UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 (Mark
One)
 
 x ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
fiscal year ended December 31, 2009.
 
 o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
transition period from _______ to _______.
 
 Commission
file number: 1-15087
 
 I.D.
SYSTEMS, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                    
                    22-3270799(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (IRS
      Employer
                      Identification
      No.)
 
 One
      University Plaza, Hackensack, New Jersey
                
                07601(Address of principal executive offices)
                
                (Zip
      Code)
 
 (201)
996-9000
 (Registrant’s
telephone number, including area code)
  Securities
registered pursuant to Section 12(b) of the Act:
 
 Common
      Stock, par value $0.01 per share
                
                The
      NASDAQ Global Market(Title
      of class)
                
                (Name
      of exchange on which
registered)
 
 Securities
registered pursuant to Section 12(g) of the Act: None
 
 Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o  No x
 
 Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.  Yes o  No x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  No o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o  No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o
                Accelerated filer oNon-accelerated filer x (Do not check if a smaller reporting company)
                Smaller reporting company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈  No x
 
 The
aggregate market value of the registrant’s common stock, par value $0.01 per
share (“Common Stock”), held by non-affiliates, computed by reference to the
closing price of the Common Stock as of June 30, 2009, the last business day of
the registrant’s most recently completed second fiscal quarter, was
approximately $35.3 million.
  The
number of shares of the registrant’s Common Stock outstanding as of March 31,
2010, was 11,253,253 shares.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Document
                
                Part of Form 10-KPortions
      of the Proxy Statement For the Registrant’s 2010 Annual Meeting of
      Stockholders
                
                Part
      III
  
  I.D. SYSTEMS, INC.
  TABLE
OF CONTENTS
  PagePART
      I.Item
      1.
                    
                    Business
                    
                    3Item
      1A.
                    
                    Risk
      Factors
                    
                    16Item
      1B.
                    
                    Unresolved
      Staff Comments
                    
                    27Item
      2.
                    
                    Properties
                    
                    27Item
      3.
                    
                    Legal
      Proceedings
                    
                    27Item
      4.
                    
                    (Removed
      and Reserved)
                    
                    27PART
      II.Item
      5.
                    
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    
                    28Item
      6.
                    
                    Selected
      Financial Data
                    
                    31Item
      7.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    32Item
      7A.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    45Item
      8.
                    
                    Financial
      Statement and Supplementary Data
                    
                    46Item
      9.
                    
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    
                    76Item
      9A.
                    
                    Controls
      and Procedures
                    
                    76Item
      9B.
                    
                    Other
      Information
                    
                    76PART
      III.Item
      10.
                    
                    Directors,
      Executive Officers and Corporate Governance
                    
                    77Item
      11.
                    
                    Executive
      Compensation
                    
                    77Item
      12.
                    
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    77Item
      13.
                    
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    78Item
      14.
                    
                    Principal
      Accounting Fees and Services
                    
                    78PART
      IV.Item
      15.
                    
                    Exhibits,
      Financial Statement Schedules
                    
                    79
  2
  PART
I.
 
 Cautionary
Note Regarding Forward-Looking Statements
 
 In
addition to historical information, this Annual Report on Form 10-K of I.D.
Systems, Inc. contains “forward-looking statements” (within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), which may include information concerning our beliefs, plans,
objectives, goals, expectations, strategies, anticipations, assumptions,
estimates, intentions, future events, future revenues or performance, capital
expenditures and other information that is not historical information.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may be beyond our control, and which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements. Many of these statements appear, in particular,
under the headings “Business,” “Selected Financial Data” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
this Annual Report on Form 10-K. When used in this report, the words “seek,”
“estimate,” “expect,” “anticipate,” “project,” “plan,” “contemplate,” “plan,”
“continue,” “intend,” “believe” and variations of such words or similar
expressions are intended to identify forward-looking statements. All
forward-looking statements are based upon our current expectations and various
assumptions. We believe there is a reasonable basis for our expectations and
beliefs, but there can be no assurance that we will realize our expectations or
that our beliefs will prove to be correct.
 
 There are
a number of risks and uncertainties that could cause our actual results to
differ materially from the forward-looking statements contained in this report.
Important factors that could cause our actual results to differ materially from
those expressed as forward-looking statements herein include, but are not
limited, to:
 
 ·
              future
      economic and business conditions;
 ·
              the
      loss of any of our key customers or reduction in the purchase of our
      products by any such customers;
 ·
              the
      failure of the market for our products to continue to
    develop;
 ·
              our
      inability to protect our intellectual
property;
 ·
              the
      possibility that we may not be able to integrate successfully the
      business, operations and employees of acquired
  businesses;
 ·
              the
      effects of competition from a wide variety of local, regional, national
      and other providers of wireless
solutions;
 ·
              changes
      in laws and regulations or changes in accounting policies, rules and
      practices;
 ·
              changes
      in technology or products, which may be more difficult or costly, or less
      effective, than anticipated; and
 ·
              those
      risks and uncertainties set forth under the heading “Risk Factors” in Item
      1A of this report.
 
 There may
be other factors of which we are currently unaware or deem immaterial that may
cause our actual results to differ materially from the forward-looking
statements. All forward-looking statements attributable to us or persons acting
on our behalf apply only as of the date they are made and are expressly
qualified in their entirety by the cautionary statements included in this
report. Except as may be required by law, we undertake no obligation to publicly
update or revise any forward-looking statement to reflect events or
circumstances occurring after the date they were made or to reflect the
occurrence of unanticipated events.
 
 Note
Regarding Trademarks
 
 I.D.
Systems, Inc. has, or has applied for, trademark protection for I.D. Systems,
Inc.®, Vehicle Asset Communicator®, Line Asset CommunicatorTM, ChaMPTM, Wireless
Asset Net®, AvRamp®, Opti-Kan®, WiFree®, Intelli-Listening®, SecureStreamTM,
PowerFleetTM and PowerKey®.
  Item 1. Business
  Overview
  I.D.
Systems, Inc. (“I.D. Systems,” the “Company,” “we,” “our” or “us”) develops,
markets and sells wireless solutions for managing and securing high-value
enterprise assets. These assets include industrial vehicles, such as forklifts
and airport ground support equipment, and rental vehicles. Our patented systems,
which utilize wireless technology, address the needs of organizations to
control, track, monitor and analyze their assets. Our solutions enable customers
to achieve tangible economic benefits by making timely, informed decisions that
increase the security, productivity and efficiency of their
operations.
  We have
focused our business activities on two primary applications: (i) industrial
fleet management and security and (ii) rental fleet management. Our solution for
industrial fleet management and security allows our customers to reduce
operating costs and capital expenditures and to comply with certain safety
regulations by accurately and reliably measuring and controlling fleet activity.
This solution also enhances security at industrial facilities and areas of
critical infrastructure, such as airports, by controlling access to, and
restricting the use of, vehicles and equipment. Our solution for traditional
rental fleet management allows rental car companies to generate higher revenue
by more accurately tracking vehicle data, such as fuel consumption and odometer
readings, and improve customer service by expediting the rental and return
processes. . In addition, our wireless solution for “carsharing” enables rental
car companies to establish a network of vehicles positioned strategically around
cities, control vehicles remotely, manage member reservations by phone or
Internet, and charge members for vehicle use by the hour.
  3
  In
addition to focusing on these core applications, we adapt our systems to meet
our customers’ broader asset management needs and seek opportunities to expand
our solution offerings through strategic acquisitions. In 2009, for example, we
acquired Didbox Ltd., a privately held, United Kingdom-based manufacturer and
marketer of vehicle operator identification systems, which provides us with a
wider range of industrial vehicle management solutions and expands our base of
operations in Europe. On January 7, 2010, we acquired the Asset Intelligence
business unit of General Electric Company, which provides trailer and container
tracking solutions for manufacturers, retailers, shippers and freight
transportation providers. The focus of Asset Intelligence on trucking, rail,
marine and intermodal applications expands the scope of assets addressed by I.D.
Systems’ solutions, and the web and mobile
communications technologies of Asset Intelligence are complementary to I.D.
Systems’ portfolio of wireless asset management patents. We believe that the
Asset Intelligence business complements the Company’s existing businesses, as
the focus of Asset Intelligence on trucking, rail, marine and intermodal
applications significantly expands the scope of assets addressed by the
Company’s product solutions. In addition, the acquisition is expected to provide
the Company with access to a broader base of customers.
 
 We sell
our system to both executive and division-level management. Typically, our
initial system deployment serves as a basis for potential expansion across the
customer’s organization. We work closely with customers to help maximize the
utilization and benefits of our system and demonstrate the value of
enterprise-wide deployments.
 
 We market
and sell our solutions to a wide range of customers in the commercial and
government sectors. Our customers operate in diverse markets, such as automotive
manufacturing, heavy industry, retail and wholesale distribution, aerospace and
defense, homeland security and vehicle rental. Based on revenues for 2009, our
top customers were the U.S. Postal Service, Wal-Mart Stores, Inc., NACCO
Materials Handling Group, Inc., and Ford Motor Company.
  The
Company was incorporated in the State of Delaware in 1993.
  4
  Our
Solution
  We design
and implement solutions that focus primarily on the closed-loop asset management
and security segment of the market for wireless technologies. In this segment,
wireless devices that provide on-board control, location tracking and data
processing are integrated with enterprise assets to provide real-time visibility
of, and two-way communications with, such assets. Our system provides
architectural and functional advantages that differentiate it from systems used
for inventory and logistics tracking. For example, while inventory tracking
systems rely on consistent radio frequency, or RF, connectivity to perform core
functions, our system requires only periodic RF communications, and our on-asset
devices perform their core functions autonomously. Unlike logistics tracking
systems, which typically require monthly expenditures for cellular or satellite
communications, our system does not require customers to incur wireless
communications costs and can track mobile assets indoors, where global
positioning systems, or GPS, receivers typically do not work and cellular
coverage can be sporadic.
  Our asset
tracking and management system consists of three principal
elements:
  ·
              miniature wireless programmable
      computers attached to
assets;
 
 ·
              fixed-position communication
      infrastructure consisting of network computers with two-way RF
      capabilities, RF-based location-emitting beacons and application-specific
      network servers; and
 
 ·
              proprietary software, which is a
      user-friendly, Windows-based and browser-based graphical user interface
      that provides visibility and control of the system
      database.
  Each of
these system elements processes and stores information independently to create a
unique, patented system of “distributed intelligence,” which mitigates the risk
that a single point of failure could compromise system integrity or data and
asset security. Our on-asset hardware stores and processes information locally
so that it can autonomously and automatically control the asset and monitor
asset activity regardless of the status or availability of other system
components. Our on-asset hardware performs its functions even when outside the
RF range of any other system component or if the facility computer network is
unavailable. Our communication infrastructure independently processes data and
executes programmable application logic, in addition to linking monitored mobile
asset data automatically to our system’s database. Our server software populates
the database and is designed to mitigate the effects of any computer outages
that could affect real-time availability of the database. Finally, our client
software interfaces only with the database, not directly with our communication
infrastructure or on-asset hardware, which restricts access to, and limits
corruption of, system information and minimizes network bandwidth
usage.
 
 We have
focused our business activities on two primary applications: (i) industrial
fleet management and security and (ii) rental fleet management. In addition to
focusing on these core applications, we have adapted, and intend to continue to
adapt, our wireless solutions to meet our customers’ broader asset management
needs.
 
 Industrial
Fleet Management and Security
 
 Our
PowerFleetTM solution for industrial fleet management and security allows fleet
operators to reduce operating costs and capital expenditures, comply with
certain safety regulations and enhance security.
  To
analyze and benchmark vehicle utilization and operator productivity, our
PowerFleet system automatically records a wide range of activity and enables
detailed performance comparisons to help management make informed decisions
about vehicle and manpower allocations. This can lead to fleet and personnel
reductions as well as increases in productivity from existing fleets. The system
also provides real-time and historical visibility of vehicle
movements.
  5
  To help
reduce fleet maintenance costs, our PowerFleet system can automate and enforce
preventative maintenance scheduling by:
  ·
              wirelessly uploading usage data
      from each vehicle;
 
 ·
              automatically prioritizing
      maintenance events based on weighted, user-defined
      variables;
 
 ·
              automatically sending reminders
      to individual vehicles or operators via the system’s text messaging
      module;
 
 ·
              enabling remote lock-out of
      vehicles overdue for maintenance;
and
 
 ·
              allowing maintenance personnel to
      locate and retrieve vehicles due for service via the system’s graphical
      viewer software.
 
 To help
improve fleet safety and security, our PowerFleet system provides, among other
things:
  ·
              compatibility with a variety of
      technologies that verify driver
identity;
 
 ·
              wireless vehicle access control
      to ensure that only trained and authorized personnel use equipment as
      required by the Occupational Safety and Health Administration, or
      OSHA;
 
 ·
              electronic vehicle inspection
      checklists for paperless proof of OSHA
  compliance;
 
 ·
              automatic reporting of emerging
      vehicle safety issues;
 
 ·
              automatic on-vehicle
      intervention, such as alarms and the disabling of equipment, in response
      to user-definable safety and security
  parameters;
 
 ·
              remote vehicle deactivation
      capabilities, allowing a vehicle to be shut down manually or automatically
      under defined conditions;
 
 ·
              impact sensing to assign
      responsibility for abusive
driving;
 
 ·
              geo-fencing to restrict vehicles
      from operating in prohibited areas or issue alerts upon unauthorized entry
      to such areas; and
 
 ·
              a graphical, icon-based view of
      vehicle safety/security/operational status on a facility map, filterable
      by a variety of conditions, both historically and in real
      time.
 
 A
specialized application of our solution in the industrial fleet management and
security market is vehicle security, particularly at airports, seaports and
other areas of critical infrastructure. The Transportation Security Act of 2001
mandates security for aircraft servicing equipment, including aircraft tow
tractors, baggage tugs, cargo loaders, catering vehicles and fuel trucks. The
airport market-specific version of our system is called AvRamp®, referencing the
aviation industry and the ramp area at airports in which aircraft servicing
equipment operates.
  6
  Rental
Fleet Management
 
 Our
solution for traditional rental fleet management is designed both to enhance the
consumer’s rental experience and benefit the rental company by providing
information that can be used to increase revenues, reduce costs and improve
customer service. Our rental fleet management system automatically uploads
vehicle identification number, mileage and fuel data as a vehicle enters and
exits the rental lot, which can significantly expedite the rental and return
processes for travelers and provide the rental company with more timely
inventory status, more accurate billing data that can generate higher
fuel-related revenue, and an opportunity to utilize customer service personnel
for more productive activities, such as inspecting vehicles for damage and
helping customers with luggage.
 
 In
addition, we provide a wireless solution for the relatively new concept of
“carsharing,” whereby a rental car company (i) positions vehicles strategically
around cities, universities and corporate campuses, (ii) remotely controls the
vehicles, (iii) manages member reservations by phone or Internet, and (iv)
charges members for vehicle use by the hour. The entire process—from remotely
controlling the car door locks to tracking car mileage and fuel consumption to
billing for the transaction—are automatically conducted by an integration of
wireless vehicle management technology and the rental company’s fleet management
software.
 
 Growth
Strategy
 
 The
Company’s objective is to become the leading global provider of wireless
solutions for managing and securing enterprise assets. To achieve this goal, we
intend to:
 
 Increase
sales in existing markets to existing customers and pursue opportunities with
new customers by:
  ·
              maintaining a sales and marketing
      team that is focused on identifying, seizing and managing revenue
      opportunities, with the primary goal of expanding our customer base and
      achieving wider market
penetration;
 
 ·
              utilizing a performance services
      team to (a) shorten our initial sales cycles by helping prospective
      customers identify and quantify benefits expected from our system, (b)
      accelerate transitions from initial implementation to roll-out programs by
      helping customers achieve and prove expected system benefits, and (c)
      build service revenue through long-term consultative engagements that help
      customers use our system to attain continuous improvements in their
      operations;
 
 ·
              utilizing a business development
      team to establish and manage value-added channel partners that provide (a)
      new sales, marketing, distribution and support networks, (b) opportunities
      for system integration and development of unique, integrated value
      propositions, and (c) software development opportunities to expand our
      product and application
offerings;
 
 ·
              utilizing a strategic markets
      team to identify opportunities for and expand sales in key vertical
      markets—such as automotive, aviation, civilian government, defense, and
      rental cars—where our solutions can be effectively branded and marketed
      with specific functionality and subject matter expertise;
      and
 
 ·
              expanding our resources and
      activities internationally, especially in Europe, where we believe
      re-packaging, promoting and supporting our products represents a large,
      untapped growth opportunity.
 
 Expand
into new applications and markets for our technology by:
 
 ·
              pursuing opportunities to
      integrate our system with computer hardware and software vendors,
      including original equipment
  manufacturers;
 
 ·
              establishing relationships with
      global distributors to market and sell our system internationally;
      and
 
 ·
              pursuing acquisitions of
      companies that we believe will enhance the functionality and broaden the
      applicability of our
solutions.
  7
  Products
and Services
 
 We offer
our customers integrated wireless solutions to control, monitor, track and
analyze their enterprise assets. Our solutions are comprised of hardware and
software, as well as maintenance, support and consulting services.
 
 Principal
Products
 
 On-Asset Hardware. With a
variety of mounting and user-interface options, our on-asset hardware is
designed to be installed quickly and easily and provide an autonomous means of
asset control and monitoring. Our on-asset hardware:
 
 ·
              contains an integrated computer,
      programmed with a product-specific application, and an advanced
      wireless transceiver with a communication range of up to one-half
      mile;
 
 ·
              controls equipment access with a
      variety of electronic interface
options;
 
 ·
              is compatible with most existing
      facility access security
systems;
 
 ·
              generates paperless electronic
      safety checklists via a built-in display and
  keypad;
 
 ·
              wirelessly and automatically
      uploads and downloads data to and from other system
      components;
 
 ·
              performs monitoring and control
      functions at all times, independent of RF or network connectivity;
      and
 
 ·
              incorporates a multi-voltage
      power supply designed to control electrical
    anomalies.
 
 Wireless Asset Managers. Most
of our system deployments require at least one fixed-position communication
device, referred to as a Wireless Asset Manager, to link the mobile assets being
monitored with the customer’s computer network or to a remotely hosted server.
Our Wireless Asset Managers conduct two-way RF communications with the assets
being monitored and can communicate on a local area network, a wide area
network, or via cellular communications. The use of Wireless Asset Managers
enables flexible system configuration options and scalability. A single Wireless
Asset Manager is enough to operate an entire asset management system. For
expanded, real-time data communication and location tracking, Wireless Asset
Managers can be added incrementally as needed. They also allow system settings
and on-asset functionality to be changed without physically interfacing with
on-asset hardware, which can save significant time and money.
  Each of
our Wireless Asset Managers:
 
 ·
              incorporates an integrated
      computer, programmed with a product specific application, and an
      advanced wireless transceiver with a communication range of up to one-half
      mile;
 
 ·
              accommodates an unlimited number
      of on-asset hardware
devices;
 
 ·
              automatically uploads and
      downloads data to and from other system
  components;
 
 ·
              employs built-in self-diagnostic
      capabilities; and
 
 ·
              is configurable to achieve a wide
      range of asset management
goals.
  8
  Server
Software. Each of our system deployments requires at least one
installation of our server software, which automatically manages data
communications between the system’s database and either the Wireless Asset
Managers or On-Asset Hardware. Our server software:
 
 ·
              is a set of Windows
      services;
  ·
              automatically processes data
      between our devices and system
  databases;
  ·
              actively polls Wireless Asset
      Managers to retrieve data on
  demand;
  ·
              passively listens to allow remote
      systems to initiate data communications for data
      download;
  ·
              automates event scheduling,
      including data downloads, database archiving and diagnostic
      notifications;
  ·
              interfaces with certain existing
      external systems, including maintenance and training
      systems;
  ·
              supports remote
      control/management of event
  processes;
  ·
              automatically performs
      diagnostics on system components;
  and
  ·
              automatically e-mails event
      alerts and customizable
reports.
 
 Client Software. Our client
software provides an intuitive, easy-to-use, user interface. The console is
deployed either as a standard client-server application or as a thin-client. The
console interfaces only with the system database, not directly with our
communication infrastructure or on-asset hardware, which restricts access to,
and limits corruption of, system information and minimizes network bandwidth
usage. An unlimited number of clients can be used on a network at any given
time.
 
 Our
client software:
 
 ·
              shows the location, status and
      inventory of vehicles – in real time and historically – in each area of a
      facility;
 
 ·
              allows real-time, two-way text
      communications, including broadcast text paging to all operators
      simultaneously;
 
 ·
              searches, sorts and analyzes
      assets by drive time, idle time, location, status, group, maintenance
      condition and other
parameters;
 
 ·
              displays and prints predefined
      and ad hoc reports; and
 
 ·
              allows remote access by
      management, customers and vendors through any Internet browser
      application.
 
 Additional
Products
 
 Battery ChaMPTM. Our Battery
Charger Monitoring Point, which we refer to as Battery ChaMP, tracks data on
industrial battery fast-charge and battery swap systems. The Battery ChaMP
provides automatic data uploads, real-time system visibility and data collection
for electric vehicle batteries and chargers. The Battery ChaMP:
 
 ·
              tracks vehicle operator
      compliance with battery charging
  requirements;
 
 ·
              enforces critical equalization
      charging schedules;
 
 ·
              monitors data necessary for
      battery warranty compliance;
and
 
 ·
              simplifies battery life
      management.
  9
  Line Asset CommunicatorTM. Our
Line Asset Communicator is a wireless messaging device that triggers automatic,
real-time task requests via radio frequency. Our Line Asset Communicator is
designed to automatically forward requests to the material handling resource
that:
 
 ·
              has been designated as capable of
      performing the work
requested;
 
 ·
              is available for work at the
      moment of request; and
 
 ·
              is physically closest to the site
      where the work must be
performed.
 
 The Line
Asset Communicator is a key component of our Opti-Kan® system, an optimized,
wireless, electronic “kanban” system. “Kanban” refers to a method of signaling
for parts replenishment on an assembly line, popularized by Japanese automobile
manufacturers to achieve “just in time” production efficiencies. Our Opti-Kan
system is designed to (i) eliminate dependence on line-of-sight parts
replenishment calls, which can optimize material handling efficiency by reducing
vehicle travel and eliminating unnecessary down time, and (ii) provide a more
dynamic, intelligent allocation of tasks to the material handling workforce that
feeds the assembly line, which can both increase the timeliness and accuracy of
parts replenishment and significantly reduce indirect labor costs.
 
 Services
 
 Maintenance Services. We
provide a warranty on all hardware and software components of our system. During
the warranty period, we either replace or repair defective hardware. We also
make extended maintenance contracts available to customers and offer ongoing
maintenance and support on a time and materials basis. Pricing for our extended
maintenance and support contracts is dependent upon the level of service we
expect to provide. Our maintenance and support services typically include remote
system monitoring, help desk technical support, escalation procedure development
and routine diagnostic data analysis. Expenses to fulfill our warranty
obligations have historically been minimal.
 
 Customer Support and Consulting
Services. We have developed a framework for the various phases of system
training and support that offers our customers both structure and flexibility.
Major training phases include hardware installation and troubleshooting,
software installation and troubleshooting, “train-the-trainer” training on asset
hardware operation, preliminary software user training, system administrator
training, information technology issue training, ad hoc training during system
launch and advanced software user training. These services are priced based on
the extent of training that the customer requests.
 
 Following
system launch and advanced training, we make additional, refresher training
available for a fee, either at the customer’s site or at our offices. The
customer may also elect to purchase additional training as part of a larger
extended maintenance contract.
 
 To help
our customers derive the most benefit from our system, we supply a broad range
of support documentation and provide initial post-launch data consulting. Our
support documentation includes hardware user guides, software manuals, vehicle
installation overviews, troubleshooting guides and issue escalation procedures.
Our initial data consulting is intended to help the customer determine which
reports and charts are most meaningful to different system users and which
specific data may represent cost-saving or productivity-enhancing
opportunities.
 
 We have
provided our consulting services, both as a stand-alone service to study the
potential benefits of implementing a wireless fleet management system, and as
part of the system implementation itself.
 
 In
certain instances, customers prepay us for extended maintenance, support and
consulting services. In those instances, the payment amount is recorded as
deferred revenue and revenue is recognized over the service
period.
  10
  Sales
and Marketing
 
 Our sales
and marketing objective is to achieve broad market penetration, with an emphasis
both on expanding business opportunities with existing customers and on securing
new customers.  As of March 30, 2010, we had 32 employees devoted to
sales and marketing, including 10 Asset Intelligence employees, three employees
based in Germany and one employee based in the United Kingdom.  As a
result of the March 19, 2010, reduction in work force, eight sales and marketing
positions will be eliminated by July 31, 2010.
 
 We market
our systems directly to commercial and government organizations and through
indirect sales channels, such as industrial equipment dealers. In addition, we
are actively pursuing strategic relationships with key companies in our target
markets — including original equipment manufacturers, complementary hardware and
software vendors, and service providers — to further penetrate these markets by
embedding our products in the assets our systems monitor and integrating our
solutions with other systems.
 
 We sell
our systems to both executive and division-level management. Typically, our
initial system deployment serves as a basis for potential expansion across the
customer’s organization.
 
 We work
closely with customers to help maximize the utilization and benefits of our
system and demonstrate the value of enterprise-wide deployments.
 
 Customers
 
 We market
and sell our wireless solutions to a wide range of customers in the commercial
and government sectors. Our customers operate in diverse markets, such as
automotive manufacturing, heavy industry, retail and wholesale distribution,
aerospace and defense, homeland security and vehicle rental.
  During
the year ended December 31, 2009, we generated revenues of $10.3 million and the
U.S. Postal Service, Wal-Mart Stores, NACCO Materials Handling Group, Inc. and
Ford Motor Company accounted for 20%, 15%, 15%, and 14%, respectively, of our
revenues. During the year ended December 31, 2008, the U.S. Postal Service and
Wal-Mart Stores, Inc. accounted for 42% and 41%, respectively, of our revenues.
During the year ended December 31, 2007, the U.S. Postal Service, Wal-Mart
Stores, Inc. and Ford Motor Company accounted for 37%, 32% and 10%,
respectively, of our revenues. No other customer accounted for greater than 10%
of our net revenues during these periods.
  The
Company enters into master agreements with its customers in the normal course of
its business. These agreements define the terms of any sales of products and/or
services by the Company to the applicable customer, including, but not limited
to, terms regarding payment, support services, termination and assignment
rights. These agreements generally obligate the Company only when products or
services are actually sold to the customer thereunder.
  We strive
to establish long-term relationships with our customers in order to maximize
opportunities for new application development and increased
sales.
  11
  Competition
 
 The
market for wireless solutions is rapidly evolving, highly competitive and
fragmented. Our target markets are also subject to quickly changing product
technologies, shifting customer needs, regulatory requirements and frequent
introductions of new products and services. A significant number of companies
have developed or are developing and marketing software and hardware for
wireless products that currently compete or will compete directly with our
solutions. We compete with organizations varying in size, including many small,
start-up companies as well as large, well capitalized organizations. While some
of our competitors focus exclusively on providing wireless solutions, many are
involved in wireless technology as an extension of a more expansive business
strategy. Many of our larger competitors are able to dedicate extensive
financial resources to the research and development and deployment of wireless
solutions. As government and commercial entities expand the use of wireless
technologies, we expect that competition will continue to increase within our
target markets.
 
 We
distinguish ourselves from our competitors by focusing on two distinct
applications: (i) industrial fleet management and security and (ii) rental fleet
management. This focus has enabled us to direct product development efforts
specifically suited for our target markets. Our on-asset device for industrial
fleet management and security is designed to operate independently of other
system components, allowing for continuous asset control and data gathering even
when the vehicle is out of RF communication range. We believe that our
proprietary technology as well as our experience in designing and developing
products for our target markets distinguishes us within these
markets.
 
 In each
of our markets, we encounter different competitors due to the competitive
dynamics of each segment. In the industrial fleet management and security
market, the wireless control, tracking and management of enterprise assets is
relatively new. Although we are not aware of any current competitors that
provide the precise capabilities of our systems, we are aware of competitors
that offer subsets of our system capabilities or alternate approaches to the
needs our products address. Those companies include both emerging companies with
limited operating histories, such as ShockWatch, a division of Media Recovery
Inc., and Access Control Group, and companies with longer operating histories,
greater name recognition and/or significantly greater financial, technical and
marketing resources than ours, such as Crown Equipment Corp., Savi Technology,
which was acquired by Lockheed Martin Company, Symbol Technologies, which was
acquired by Motorola, Inc., Intermec, Inc. and Zebra Enterprise Solutions, a
division of Zebra Technologies, Corporation.
 
 In the
rental fleet management market, we compete primarily against handheld device
companies that currently provide the solutions used by vehicle rental companies.
Currently, our principal competitors in this market are handheld device
providers, such as Motorola, and
other wireless technology companies, such as Zebra Enterprise Solutions, a
division of Zebra Technologies, Corporation. Although handheld device providers
currently control the majority of the rental fleet market, we believe a shift to
other wireless technologies, such as our patented rental fleet management
system, represents a compelling opportunity for vehicle rental companies, with
the potential to increase both operating efficiency and customer satisfaction.
Because of these potential benefits, we believe our market-focused product
development strategy, portfolio of intellectual property and proven system
efficacy are key competitive advantages in this market.
  12
  Research
and Development
 
 As of
March 30, 2010, including our executive vice president of engineering, our
research and development group was comprised of 20 full-time employees
(including nine Asset Intelligence employees).  These employees have
expertise in areas such as software and hardware design, wireless communications
and mechanical and electrical engineering.  As a result of the March
19, 2010, reduction in work force, five research and development positions will
be eliminated by July 31, 2010.
 
 We spent
$2.8 million, $2.9 million and $2.6 million for research and development during
years ended December 31, 2007, 2008 and 2009, respectively.
 
 We have
focused our research and development efforts on the evolution of our wireless
asset management system as a “universal system” to promote more widespread use
of our technology for a broader range of equipment, with easier installations,
maintenance and support, and with fewer configuration concerns. Using our
universal platform, we have adapted our technology to meet the needs of several
emerging markets, including rental fleet management, airport vehicle security,
industrial battery charging management and remote automated machine
monitoring.
 In our
effort to expand our product beyond North America, we achieved product
compliance certification, including European Telecommunications Standard
Institutes and European Conformity certification, for our primary product line.
In addition, we have completed our conversion of those products to meet the
requirements of the European Union’s Restriction of certain Hazardous Substances
Directive (RoHS) and its Waste Electrical and Electronic Equipment (WEEE)
regulations. These efforts included redesign of circuitry, replacement of
components and materials, and new marking and documentation. This has permitted
us to market and sell our integrated wireless solutions in the European
Union.
 
 Additionally,
we have utilized resources to design an alternative system architecture that
leverages customers’ existing Wi-Fi (802.11 b/g) wireless network
infrastructures. Leveraging the “distributed intelligence” of our patented
system design, our Wi-Fi solution overcomes many of the complexities and
limitations of a mobile Wi-Fi implementation. In our Wi-Fi system deployments,
Wireless Asset Managers are not required, but can still be used to improve the
effectiveness of the system. With this new Wi-Fi architecture, we now can
provide more flexibility to end-users who want the operational benefits of our
system but require the use of their existing Wi-Fi wireless
infrastructure.
 
 We have
also developed a cellular communications option for our systems, which enables
customers to choose a hosted system model that reduces or eliminates the need to
engage information technology resources for system deployment and software
maintenance.
 
 Our
current research and development efforts are focused on:
 
 ·
              enhancing productivity by
      continuing to add to the functionality and reduce the costs of our
      system;
 
 ·
              expanding our system to meet the
      needs of potential markets and to provide new solutions to our customers;
      and
 
 ·
              improving our core products by
      utilizing continuing advances in
  technology.
 
 Intellectual
Property
 
 Patents
 
 We
attempt to protect our technology and products through the pursuit of patent
protection in the United States and certain foreign jurisdictions. We have built
a portfolio of patents and patent applications relating to aspects of our
technology and products. As of March 31, 2010, we have nine U.S. patents and
nineteen pending U.S. patent applications. With the timely payment of all
maintenance fees, our U.S. patent that covers our wireless asset management
system (U.S. Patent Number 5,682,142) expires on October 28, 2014, our U.S.
patent that covers our rental car fleet management system (U.S. Patent Number
6,898,493) expires on April 6, 2020, our U.S. patent that covers our wireless
asset management system (U.S. Patent Number 7,165,040) expires on April 28,
2023), our U.S. patent that covers our wireless asset management system (U.S.
Patent Number 7,171,381) expires on December 20, 2019, our U.S. patent that
covers our wireless asset management system (U.S. Patent Number 7,356,494)
expires on December 10, 2023, our U.S. patent that covers our wireless asset
management system (U.S. Patent Number 7,656,271) expires on May 6, 2024, and our
U.S. patents that covers our RFID tracking system (U.S. Patent Numbers
7,656,273; 7,667,573; and 7,683,760 ) expire on November 26, 2027; March 1,
2026; and March 1, 2026 respectively.
  13
  U.S.
Patent Number 5,682,142, entitled “Electronic Control System/Network,” is
directed toward a network of programmable, location marking and processing,
movable tag nodes and a fixed position tag node. The movable and fixed tag nodes
communicate directly and are capable of location identification and logical
control of environmental conditions without requiring a central
processor.
 
 U.S.
Patent Number 6,898,493, entitled “Fully Automated Vehicle Rental System,” is
directed toward an automated vehicle rental system. The system uses vehicle
monitors mounted in each rental vehicle for keeping track of vehicle data, such
as mileage, fuel level and location of the vehicle. The system transmits the
vehicle data to a central database for automatically completing the checkout of
the vehicle.
  U.S.
Patent Numbers 7,356,494 and 7,656,271 entitled “Robust Wireless Communications
System Architecture and Asset Management Applications Performed Thereon,” and
“System and Method for Managing a Remotely Located Asset” are directed toward
automated asset monitoring and control systems.  The system uses asset
monitors mounted on each asset to collect data regarding the asset and to
transmit the collected data to a management computer.  The asset monitor
also controls the operation of the asset based on the collected data and on
control data received from the management computer.
 
 U.S.
Patent Number 7,165,040 and U.S. Patent Number 7,171,381, entitled “System and
Method for Managing Remotely and Distantly Located Assets” and “System
Architecture and Communications for an Asset Management System,” respectively,
are directed toward protection for wireless, bi-directional
communications between intelligent asset monitoring devices and central data
processing nodes.  The patented systems enable monitoring and control of
remote assets in environments where wireless communication networks are
overburdened or not reliable.
  U.S.
Patent Number 7,656,273 entitled Mobile Portal for RFID Luggage Handling
Applications is directed toward a system for reading luggage tags as luggage is
loaded and unloaded. The system further compares the read luggage tags to a list
of expected items and controls operation of the luggage loader based on the
results of the comparison.
 
 U.S.
Patent Numbers 7,667,573 and 7,683,760, both entitled “Mobile Portal for RFID
Applications, are directed toward a system for reading RFID tags based on the
detection of data from one or more sensors. In the ‘573 Patent, RFID tags are
read multiple times based on detection that a mobile asset is moving and a
second time after the mobile asset has traveling a certain distance. Such
multiple reads are used to confirm that the list of read tags is correct. The
‘760 Patent is directed to a similar system that initiates tag reads when the
sensors detect vehicle motion and lift operation.
 
 We have
foreign patents in China, Australia and Mexico covering our wireless asset
management system. We also have patent applications for our system pending in
Japan, Europe and Canada and patent applications for our mobile RFID portal
pending in Canada, China, Mexico, Europe and Australia. Because of the
differences in patent laws and laws concerning proprietary rights, the extent of
protection provided by U.S. patents or proprietary rights owned by us may differ
from that of their foreign counterparts.
 
 Trademarks
 
 We have,
or have applied for, trademark protection for I.D. Systems, Inc.®, Vehicle Asset
Communicator®, Line Asset CommunicatorTM, ChaMP®, Wireless Asset Net®, AvRamp®,
Opti-Kan®, WiFree®, Intelli-Listening®, SecureStreamTM, PowerFleetTM and
PowerKey®.
 
 We
attempt to avoid infringing known proprietary rights of third parties in our
product development and sales efforts. However, it is difficult to proceed with
certainty in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential at the time
of the application filing, with regard to similar technologies. If we were to
discover that our products violate third-party proprietary rights, we may not be
able to:
 
 ·
              obtain licenses to continue
      offering such products without substantial
      reengineering;
 
 ·
              reengineer our products
      successfully to avoid
infringement;
 
 ·
              obtain licenses on commercially
      reasonable terms, if at all;
or
 
 ·
              litigate an alleged infringement
      successfully or settle without substantial expense and damage
      awards.
 
 Any
claims against us relating to the infringement of third-party proprietary
rights, even if without merit, could result in the expenditure of significant
financial and managerial resources or in injunctions preventing us from
distributing certain products. Such claims could materially adversely affect our
business, financial condition and results of operations.
 
 Our
software products are susceptible to unauthorized copying and uses that may go
undetected, and policing such unauthorized use is difficult. In general, our
efforts to protect our intellectual property rights through patent, copyright,
trademark and trade secret laws and contractual safeguards may not be effective
to prevent misappropriation of the technology, or to prevent the development and
design by others of products or technologies similar to or competitive with
those developed by us. Our failure or inability to protect our proprietary
rights could materially adversely affect our business, financial condition and
results of operations.
  14
  Manufacturing
 
 We
outsource our hardware manufacturing operations to leading contract
manufacturers, such as Flextronics International Ltd. This strategy enables us
to focus on our core competencies — designing hardware and software systems and
delivering solutions to customers — and avoid investing in capital-intensive
electronics manufacturing infrastructure. Outsourcing also provides us with the
ability to ramp up deliveries to meet increases in demand without increasing
fixed expenses.
 
 Our
manufacturers are responsible for obtaining the necessary components and
supplies to manufacture our products. While components and supplies are
generally available from a variety of sources, manufacturers generally depend on
a limited number of suppliers. In the past, unexpected demand for communication
products caused worldwide shortages of certain electronic parts and allocation
of such parts by suppliers that had an adverse impact on the ability of
manufacturers to deliver products as well as on the cost of producing such
products.
 
 Due to
the general availability of manufacturers for our products, we do not believe
that the loss of any of our manufacturers would have a long-term material
adverse effect on our business, although there could be a short-term adverse
effect on our business.
 
 We
generally attempt to maintain sufficient inventory to meet customer demand for
products, as well as to meet anticipated sales levels. If our product mix
changes in unanticipated ways, or if sales for particular products do not
materialize as anticipated, we may have excess inventory or inventory that
becomes obsolete. In such cases, our operating results could be negatively
affected.
 
 Government
Regulations
 
 The use
of radio emissions are subject to regulation in the United States by various
federal agencies, including the Federal Communications Commission, or FCC, and
OSHA. Various state agencies also have promulgated regulations which concern the
use of lasers and radio/electromagnetic emissions standards.
 
 Regulatory
changes in the United States and other countries in which we may operate in the
future could require modifications to some of our products for us to continue
manufacturing and marketing our products.
 
 Our
products intentionally transmit radio signals, including narrow band and spread
spectrum signals, as part of their normal operation. We have obtained
certification from the FCC for our products that require certification. Users of
these products in the United States do not require any license from the FCC to
use or operate our products. To market and sell our integrated wireless
solutions in the European Union, we also utilize unlicensed radio spectra, and
have obtained the required European Norm (EN) certifications.
 
 In
addition, some of our operations use substances regulated under various federal,
state and local laws governing the environment and worker health and safety,
including those governing the discharge of pollutants into the ground, air and
water, the management and disposal of hazardous substances and wastes and the
cleanup of contaminated sites. Certain of our products are subject to various
federal, state and local laws governing chemical substances in electronic
products.
 
 The
adoption of unfavorable regulations, or unfavorable interpretations of existing
regulations by courts or regulatory bodies, could require us to incur
significant compliance costs, cause the development of the affected markets to
become impractical or otherwise adversely affect our ability to produce or
market our products.
 
 Employees
 
 As of
March 30, 2010, we had 115 full-time employees, including 42 Asset Intelligence
employees and five employees based in Germany and the United Kingdom, of which
27 were engaged in customer service, 20 in product development (which includes
engineering), 12 in operations, 32 in sales and marketing, and 24 in finance and
administration.  As a result of the March 19, 2010, reduction in work
force, described below, an additional 25 positions will be eliminated by July
31, 2010.  None of our employees are represented by union or
collective bargaining agreements.  We believe that our relationships
with our employees are good.
 
 As a
result of the integration of Asset Intelligence, on March 19, 2010, we
eliminated 39 positions within our company, representing approximately 32% of
our total personnel by July 31, 2010. We achieved significant synergies with the
integration of Asset Intelligence into the I.D. Systems business. The total
severance costs is expected be approximately $456,000.  In order
to earn the severance payment, employees must complete their transition duties
and execute a general release agreement.  These charges will be
incurred beginning in the first quarter of 2010 and are expected to continue
through the third quarter of 2010.  The Company expects the reduction
in work force to be completed by the end of the third quarter of
2010.
 
 Available
Information
 
 Our
primary website is www.id-systems.com.
We make available on this website, free of charge, our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or
furnish such information to, the Securities and Exchange Commission (“SEC”). We
also make available on this website, free of charge, our Code of Ethics for
Senior Financial Officers, which applies to our principal executive officer,
principal financial officer and principal accounting officer.
  15
  Item 1A.   Risk Factors
 
 In
addition to the other information contained in this Annual Report on Form 10-K,
the following risk factors should be considered carefully in evaluating the
Company’s business. Our business, financial condition or results of operations
could be materially and adversely affected by any of these risks. Additional
risks not presently known to the Company or that the Company currently deems
immaterial may also adversely affect its business, financial condition or
results of operations.
 
 We
have incurred significant losses and have a substantial accumulated deficit. If
we cannot achieve profitability, the market price of our common stock could
decline significantly.
 
 We
incurred net losses of approximately $7.3 million, $4.2 million and $13.2
million for the years ended December 31, 2007, 2008 and 2009, respectively, and
have incurred additional net losses since inception. At December 31, 2009, we
had an accumulated deficit of approximately $36.9 million. Our ability to
increase our revenues from the sale of our products will depend on our ability
to successfully implement our growth strategy and the continued expansion of our
markets. During 2009, the market price of our common stock declined
significantly. If our revenues do not grow or if our operating expenses continue
to increase, we may not be able to become profitable and the market price of our
common stock could decline further.
 
 We
are highly dependent upon sales of our wireless asset management system to a few
customers. The loss of any of these customers, or any material reduction in the
amount of our products they purchase, could materially and adversely affect our
financial condition and results of operations.
 
 During
the year ended December 31, 2009, we generated revenues of $10.3 million and the
U.S. Postal Service, Wal-Mart Stores, NACCO Materials Handling Group, Inc. and
Ford Motor Company accounted for 20%, 15%, 15%, and 14% of our revenues,
respectively. During the year ended December 31, 2008, the U.S. Postal Service
and Wal-Mart Stores, Inc. accounted for 42% and 41% of our revenues,
respectively. During the year ended December 31, 2007, the U.S. Postal Service,
Wal-Mart Stores, Inc. and Ford Motor Company accounted for 37%, 32% and 10% of
our revenues, respectively. Some of these and other customers operate in markets
that have suffered business downturns in the past few years or may so suffer in
the future. The loss of or any material reduction in the amount of our products
that these customers purchase, or any material adverse change in the financial
condition of such customers, could materially and adversely affect our financial
condition and results of operations. If we are unable to replace such revenue
from existing or new customers, the market price of our common stock could
decline significantly.
  If
the market for our technology does not develop or become sustainable, expands
more slowly than we expect or becomes saturated, our revenues will continue to
decline and our financial condition and results of operations could be
materially and adversely affected.
 
 Our
success is highly dependent on the continued market acceptance of our wireless
asset management system. The market for our wireless products and services is
new and rapidly evolving. If the market for our products and services does not
become sustainable, or becomes saturated with competing products or services,
our revenues will continue to decline and our financial condition and results of
operations could be materially and adversely affected.
 
 If
we are unable to keep up with rapid technological change, we may be unable to
meet the needs of our customers, which could materially and adversely affect our
financial condition and results of operations and reduce our ability to grow our
market share.
  Our
market is characterized by rapid technological change and frequent new product
announcements. Significant technological changes could render our existing
technology obsolete. We are active in the research and development of new
products and technologies and in enhancing our current products. However,
research and development in our industry is complex and filled with uncertainty.
For example, it is common for research and development projects to encounter
delays due to unforeseen problems, resulting in low initial volume production,
fewer product features than originally considered desirable and higher
production costs than initially budgeted, any of which may result in lost market
opportunities. In addition, these new products may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of
market acceptance. If our efforts do not lead to the successful development,
marketing and release of new products that respond to technological developments
or changing customer needs and preferences, our revenues and market share could
be materially and adversely affected. We may expend a significant amount of
resources in unsuccessful research and development efforts. In addition, new
products or enhancements by our competitors may cause customers to defer or
forego purchases of our products. Any of the foregoing could materially and
adversely affect our financial condition and results of operations and reduce
our ability to grow our market share.
  16


The
long and variable sales cycles for our solutions may cause our revenues and
operating results to vary significantly from quarter to quarter or year to year,
which could adversely affect the market price of our common stock.
 
 We expect
that customers who utilize our solutions will do so as part of a large-scale
deployment of these solutions across multiple or all divisions of their
organizations. A customer’s decision to deploy our solutions throughout its
organization will involve a significant commitment of its resources.
Accordingly, initial implementations may precede any decision to deploy our
solutions enterprise-wide. Throughout this sales cycle, we may spend
considerable time and expense educating and providing information to prospective
customers about the benefits of our solutions.
 
 The
timing of the deployment of our solutions may vary widely and will depend on the
specific deployment plan of each customer, the complexity of the customer’s
organization and the difficulty of such deployment. Customers with substantial
or complex organizations may deploy our solutions in large increments on a
periodic basis. Accordingly, we may receive purchase orders for significant
dollar amounts on an irregular and unpredictable basis. Because of our limited
operating history and the nature of our business, we cannot predict the timing
or size of these sales and deployment cycles. Long sales cycles, as well as our
expectation that customers will tend to place large orders sporadically with
short lead times, may cause our revenue and results of operations to vary
significantly and unexpectedly from quarter to quarter. These variations could
materially and adversely affect the market price of our common
stock.
  17
  If
we are unable to protect our intellectual property rights, our financial
condition and results of operations could be materially and adversely
affected.
 
 We rely
on a combination of patents, copyrights, trademarks, trade secrets and
contractual measures to protect our intellectual property rights. Third parties
may seek to challenge, invalidate, circumvent or render unenforceable any
patents or proprietary rights owned by us. If such challenges are successful,
our business will be materially and adversely affected.
 
 Our
employees, consultants and advisors enter into confidentiality agreements with
us that prohibit the disclosure or use of our confidential information. We also
have entered into confidentiality agreements to protect our confidential
information delivered to third parties for research and other purposes. Despite
these efforts, we cannot assure you that we will be able to effectively enforce
these agreements or our confidential information will not be disclosed, that
others will not independently develop substantially equivalent confidential
information and techniques or otherwise gain access to our confidential
information or that we can meaningfully protect our confidential
information.
 
 Disputes
may arise in the future with respect to the ownership of rights to any
technology developed with advisors or collaborators. These and other possible
disagreements could lead to delays in the collaborative research, development or
commercialization of our systems, or could require or result in costly and
time-consuming litigation that may not be decided in our favor. Any such event
could materially and adversely affect our financial condition and results of
operations.
 
 Policing
the unauthorized use of our intellectual property is difficult, and we cannot
assure you that the steps we have taken will prevent unauthorized use of our
technology or other intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. Accordingly, we may not be able to protect our proprietary rights
against unauthorized third party copying or use. If we are unsuccessful in
protecting our intellectual property, we may lose any technological advantages
we have over competitors and our financial condition and results of operations
could be materially and adversely affected.
 
 We
may become involved in an intellectual property dispute that could subject us to
significant liability, divert the time and attention of our management and
prevent us from selling our products, any of which could materially and
adversely affect our financial condition and results of operations.
 
 In recent
years, there has been significant litigation in the United States and
internationally involving claims of alleged infringement of patents and other
intellectual property rights. Litigation may be necessary to enforce our
intellectual property rights, defend ourselves against alleged infringement and
determine the scope and validity of our intellectual property
rights.
 
 Any such
litigation, whether or not successful, could result in substantial costs, divert
the time and attention of our management and prevent us from selling our
products. If a claim of patent infringement was decided against us, we could be
required to:
 
 ·
              pay substantial damages to the
      party making such claim;
 
 ·
              stop selling, making, having made
      or using products or services that incorporate the challenged intellectual
      property;
 
 ·
              obtain from the holder of the
      infringed intellectual property right a license to sell, make or use the
      relevant technology, which license may not be available on commercially
      reasonable terms, or at all;
or
 
 ·
              redesign those products or
      services that incorporate such intellectual
    property.
 
 The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products and could materially and
adversely affect our financial condition and results of
operations.
  18
  The U.S. government’s right to use technology developed by us
with government funds could limit our intellectual property
rights.
 
 We have
developed, and may in the future develop, improvements to our technology that
are funded in part by the U.S. government. As a result, we do not have the right
to prohibit the U.S. government from using certain technologies developed by us
with such government funds or to prohibit third parties from using those
technologies to provide products and services at the request of the U.S.
government. Although such government rights do not affect our ownership of the
technology developed using such funds, the U.S. government has the right to
royalty-free use of technologies that we have developed under such contracts. We
are free to commercially exploit those government funded technologies and may
assert our intellectual property rights to seek to block other non-government
users thereof, but we cannot assure you that we can successfully do
so.
 
 We
rely on subcontractors to manufacture and deliver our products. Any quality or
performance failures by our subcontractors or changes in their financial
condition could disrupt our ability to supply quality products to our customers
in a timely manner, resulting in business interruptions, increased costs, claims
for damages, reputation damage and reduced revenue.
 
 In order
to meet the requirements under our contracts, we rely on subcontractors to
manufacture and deliver our products to our customers. Any quality or
performance failures by our subcontractors or changes in their financial or
business condition could disrupt our ability to supply quality products to our
customers in a timely manner. If we are unable to fulfill orders from our
customers in a timely manner, we could experience business interruption,
increased costs, damage to our reputation and loss of our customers. In
addition, we may be subject to claims from our customers for failing to meet our
contractual obligations. Although we have several sources for production, the
inability to provide our products to our customers in a timely manner could
result in the loss of customers and our revenues could be materially reduced. In
addition, there is great competition for the most qualified and competent
subcontractors. If we are unable to hire qualified subcontractors, the quality
of our services and products could decline. Furthermore, third-party
manufacturers in the electronic component industry are consolidating. The
consolidation of third-party manufacturers may give remaining manufacturers
greater leverage to increase the prices that they charge, thereby increasing our
manufacturing costs. If we are unable to pass the increased costs onto our
customers, our profitability could be materially and adversely
affected.
 
 We
rely on a limited number of suppliers for several significant components and raw
materials in our products. If we are unable to obtain these components or raw
materials on a timely basis, we will be unable to meet our customers’ orders,
which could reduce our revenues, subject us to claims for damages and adversely
affect our relationships with our customers.
 
 We rely
on a limited number of suppliers for the components and raw materials used in
our products, including Flextronics. Although there are many suppliers for most
of our component parts and raw materials, we are dependent on a limited number
of suppliers for many of our significant components and raw materials. This
reliance involves a number of significant risks, including:
 
 ·
              unavailability of materials and
      interruptions in delivery of components and raw materials from our
      suppliers, which could result in manufacturing delays;
      and
 
 ·
              fluctuations in the quality and
      price of components and raw
materials.
 
 We
currently do not have any long-term or exclusive purchase commitments with any
of our suppliers. In addition, our suppliers may enter into exclusive
arrangements with our competitors, be acquired by our competitors, stop selling
their products or components to us at commercially reasonable terms or at all.
We may not be able to develop alternative sources for the components and raw
materials. Even if alternate suppliers are available to us, identifying them is
often difficult and time consuming. If we are unable to obtain an ample supply
of product or raw materials from our existing suppliers or alternative sources
of supply, we may be unable to satisfy our customers’ orders, which could reduce
our revenues, subject us to claims for damages and adversely affect our
relationships with our customers.
 
 If
we lose our executive officers, or are unable to recruit additional personnel,
our ability to manage our business could be materially and adversely
affected.
 
 We are
dependent on the continued employment and performance of our executive officers.
We currently do not have employment agreements with any of our executive
officers. Like other companies in our industry, we face intense competition for
qualified personnel. Many of our competitors have greater resources than we have
to hire qualified personnel. Accordingly, if we are not successful in attracting
or retaining qualified personnel in the future, our ability to manage our
business could be materially and adversely affected.
  19
  The industry in which we operate is highly competitive, and
competitive pressures from existing and new companies could have a material
adverse effect on our financial condition and results of
operations.
 
 The
industry in which we operate is highly competitive and influenced by the
following:
 
 ·
              advances in
      technology;
 
 ·
              new product
      introductions;
 
 ·
              evolving industry
      standards;
 
 ·
              product
      improvements;
 
 ·
              rapidly changing customer
      needs;
 
 ·
              intellectual property invention
      and protection;
 
 ·
              marketing and distribution
      capabilities;
 
 ·
              ability to attract highly skilled
      professionals;
 
 ·
              competition from highly
      capitalized companies;
 
 ·
              entrance of new
      competitors;
 
 ·
              ability of customers to invest in
      information technology; and
 
 ·
              price
      competition.
 
 The
products marketed by us and our competitors are becoming more complex. As the
technological and functional capabilities of future products increase, these
products may begin to compete with products being offered by traditional
computer, network and communications industry participants that have
substantially greater financial, technical, marketing and manufacturing
resources than we do.
 
 Although
we are not aware of any current competitors that provide the precise
capabilities of our systems, we are aware of competitors that offer subsets of
our system capabilities or alternate approaches to the needs our products
address. Those companies include both emerging companies with limited operating
histories, such as ShockWatch, a division of Media Recovery, Inc., and Access
Control Group L.L.C., and companies with longer operating histories, greater
name recognition and/or significantly greater financial, technical and marketing
resources than ours, such as Crown Equipment Corp., Savi Technology, Inc., which
was acquired by Lockheed Martin Company, Symbol Technologies, Inc., which was
acquired by Motorola, Inc., Intermec, Inc. and Zebra Enterprise Solutions, a
division of Zebra Technologies, Corporation.
 
 If we do
not keep pace with product and technology advances, including the development of
superior products by our competitors, or if we are unable to otherwise compete
successfully against our competitors, there could be a material adverse effect
on our competitive position, revenues and prospects for growth. As a result, our
financial condition and results of operations could be materially and adversely
affected.
  20
  Our
recent employee layoff may disrupt, hinder or delay our business
activities.
 
 As a
result of the integration of Asset Intelligence, on March 19, 2010, we
eliminated 39 positions within our company, representing approximately 32% of
our total personnel by July 31, 2010. Although we have reassigned the duties
associated with these eliminated positions to other personnel, inefficiencies
related to task unfamiliarity, heavier workloads, potential loss of knowledge
and unfilled gaps may arise, especially if we are unable to effectively manage
and implement the transition. Any such inefficiency may cause disruption or
delay in our business activities.
  The
federal government or independent standards organizations may implement
significant regulations or standards that could adversely affect our ability to
produce or market our products.
 
 Our
products transmit radio frequency waves, the transmission of which is governed
by the rules and regulations of the FCC, as well as other federal and state
agencies. Our ability to design, develop and sell our products will continue to
be subject to these rules and regulations for the foreseeable future. In
addition, our products and services may become subject to independent industry
standards. The implementation of unfavorable regulations or industry standards,
or unfavorable interpretations of existing regulations by courts or regulatory
bodies, could require us to incur significant compliance costs, cause the
development of the affected products to become impractical or otherwise
adversely affect our ability to produce or market our products. The adoption of
new industry standards applicable to our products may require us to engage in
rapid product development efforts that would cause us to incur higher expenses
than we anticipated. In some circumstances, we may not be able to comply with
such standards, which could materially and adversely affect our ability to
generate revenues through the sale of our products.
 
 Because
our products are complex, they may have undetected errors or failures when they
are introduced that could seriously harm our business.
 
 Technical
products like ours often contain undetected errors or failures when first
introduced. Despite our efforts to eliminate these flaws, there still may be
flaws in our products, even after the commencement of commercial shipments.
Because our products are used in business-critical applications, we could be
subject to product liability claims if our systems fail to perform as intended.
Even unsuccessful claims against us could result in costly litigation and the
diversion of management’s time and resources and could damage our reputation and
impair the marketability of our systems. Although we maintain insurance, we
cannot assure you that:
 
 ·
              our insurance will provide
      adequate coverage against potential liabilities if our products cause harm
      or fail to perform as promised;
or
 
 ·
              adequate product liability
      insurance will continue to be available to us in the future on
      commercially reasonable terms or at
all.
 
 If our
insurance is insufficient to pay any product liability claims, our financial
condition and results from operations could be materially and adversely
affected. In addition, any such claims could permanently injure our
reputation.
 
 We
may need to obtain additional capital to fund our operations that could have
negative consequences on our business.
 
 We may
require additional capital in the future to develop and commercialize additional
products and technologies or take advantage of other opportunities that may
arise, including potential acquisitions. We may seek to raise the necessary
funds through public or private equity offerings, debt financings or strategic
alliances and licensing arrangements. To the extent we raise additional capital
by issuing equity securities, our existing stockholders may experience
substantial dilution. If additional capital is raised through debt, such debt
may subject us to significant restrictive covenants that could affect our
ability to operate our business. In addition, we may be required to relinquish
rights to our technologies or systems, or grant licenses on terms that are not
favorable to us in order to raise additional funds through alliance, joint
venture and licensing arrangements. If adequate funds are not available, we may
be required to delay, reduce the scope of or eliminate one or more of our
development programs, and our business, financial condition, results of
operations and stock price could be materially and adversely
affected.
  21
  If we do not adequately anticipate and respond to the risks
inherent in growing our business internationally, our operating results and the
market price of our common stock could be materially and adversely
affected.
 
 To date,
we have not generated significant revenues outside of North America. As part of
our growth strategy, we are seeking ways to expand our operations outside of
North America by establishing offices overseas and developing relationships with
global distributors to market and sell our systems internationally. For example,
as of December 31, 2009, we had three employees in Germany and one in the
United Kingdom who market and sell our systems in Europe. There are a number of
risks inherent in doing business in international markets,
including:
 
 ·
              unexpected legal or regulatory
      changes;
 
 ·
              unfavorable political or economic
      factors;
 
 ·
              less developed
      infrastructure;
 
 ·
              difficulties in recruiting and
      retaining personnel, and managing international
      operations;
 
 ·
              fluctuations in foreign currency
      exchange rates;
 
 ·
              lack of sufficient protection for
      intellectual property rights;
and
 
 ·
              potentially adverse tax
      consequences.
 
 Until
recently, we had no operations outside of North America, and we have limited
experience establishing or operating businesses outside of North America. If we
do not adequately anticipate and respond to the risks inherent in international
operations, our operating results and the market price of our common stock could
be materially and adversely affected. In addition, although we intend to expand
our business outside of North America, there are risks associated with
conducting an international operation, including the risks listed above, and
such expansion may not be successful or have a positive effect on, and could
materially and adversely affect, our financial condition and results of
operations.
 
 Since
our inception, we have not made a significant number of acquisitions, and
we cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future.
 
 We may,
from time to time, continue to consider investments in or acquisitions of
complementary companies, products or technologies. In the event of any future
acquisitions, we could:
 
 ·
              issue stock that would dilute our
      current stockholders’ percentage
  ownership;
 
 ·
              incur
  debt;
 
 ·
              assume
      liabilities;
 
 ·
              incur expenses related to the
      impairment of goodwill; or
 
 ·
              incur
      large and immediate write-offs.
 
 We may
not be able to identify suitable acquisition candidates, and if we do identify
suitable candidates, we may not be able to make these acquisitions on acceptable
terms, or at all.
  22
  Our
operation of any acquired business will also involve numerous risks,
including:
 
 ·
              problems combining the acquired
      operations, technologies or
products;
 
 ·
              unanticipated
      costs;
 
 ·
              diversion of management’s time
      and attention from our core
business;
 
 ·
              adverse effects on existing
      business relationships with suppliers and
  customers;
 
 ·
              risks associated with entering
      markets in which we have no or limited prior experience;
      and
 
 ·
              potential loss of key employees,
      particularly those of acquired
companies.
 
 Since our
inception, we have not made any acquisitions other than the PowerKey acquisition
during 2008, the Didbox Ltd. acquisition during 2009, and the acquisition of
General Electric Company’s Asset Intelligence business in early 2010, and we
cannot assure you that we will be able to successfully integrate any businesses,
products, technologies or personnel that we have acquired or that we might
acquire in the future. Any failure to do so could have a material adverse effect
on our financial condition and results of operations. Acquisitions also involve
the risk of potential unknown liabilities associated with the acquired business.
As a result of these risks, we may not be able to achieve the expected benefits
of any acquisition, including the Asset Intelligence acquisition, which was of
particular significance to the Company in terms of the size of the acquisition
relative to the size of the Company. The successful integration of Asset
Intelligence will require, among other things, integration of Asset
Intelligence’s operations, products, policies and personnel with our business.
We may not achieve successful integration in a timely manner, or at all, and we
may not realize the anticipated benefits and synergies of the acquisition to the
extent, or in the timeframe, anticipated.
 
 The
concentration of common stock ownership among our executive officers and
directors could limit the ability of other stockholders of the Company to
influence the outcome of corporate transactions or other matters submitted for
stockholder approval.
 
 As of
March 31, 2010, our executive officers and directors beneficially owned, in the
aggregate, 13% of our outstanding common stock, not including 1,765,398 shares
of common stock that our executive officers and directors may acquire upon the
exercise of outstanding options or if they otherwise acquire additional shares
of common stock in the future. As a result, our officers and directors may have
the ability to influence the outcome of all corporate actions requiring
stockholder approval, irrespective of how our other stockholders may vote,
including the following actions:
 
 ·
              the election of
      directors;
 
 ·
              adoption of stock option or other
      equity incentive compensation
plans;
 
 ·
              the amendment of our
      organizational documents;
and
 
 ·
              the approval of certain mergers
      and other significant corporate transactions, including a sale of
      substantially all of our
assets.
  23
 
 The unpredictability of our quarterly operating results could
adversely affect the market price of our common stock.
 
 Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors, many of which are outside of our control and any of
which could adversely affect the market price of our common stock. The main
factors that may affect us include the following:
 
 ·
              variations in the sales of our
      products to our significant
customers;
 
 ·
              variations in the mix of products
      and services provided by us;
 
 ·
              the timing and completion of
      initial programs and larger or enterprise-wide purchases of our products
      by our customers;
 
 ·
              the length and variability of the
      sales cycle for our
products;
 
 ·
              the timing and size of
      sales;
 
 ·
              changes in market and economic
      conditions, including fluctuations in demand for our products;
      and
 
 ·
              announcements of new products by
      our competitors.
 
 As a
result of these and other factors, revenues for any quarter are subject to
significant variation that could adversely affect the market price for our
common stock.
 
 Future
sales of our common stock, including sales of our common stock acquired upon the
exercise of outstanding options, may cause the market price of our common stock
to decline.
 
 The
market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market, or sales of our
common stock acquired upon the exercise of outstanding options, or the
perception that these sales could occur. These sales also may make it more
difficult for us to sell equity securities at a time and price that we deem
appropriate.
 
 We have
11,253,253 shares of common stock outstanding as of March 31, 2010, of which
9,741,024 shares are freely transferable without restriction, and 1,512,229
shares are held by our officers and directors and, as such, are subject to
the applicable volume, manner of sale, holding period and other limitations of
Rule 144 under the Securities Act. In addition, as of December 31, 2009, options
to purchase 2,659,000 shares of our common stock were issued and outstanding, of
which 1,662,000 were vested. The remaining options will vest ratably over a
five-year period measured from the date of grant. The weighted-average exercise
price of the vested stock options is $9.51. We also may issue additional shares
of stock in connection with our business, including in connection with
acquisitions, and may grant additional stock options to our employees, officers,
directors and consultants under our stock option plans or warrants to third
parties. If a significant portion of these shares of common stock were sold in
the public market, the market value of our common stock could be adversely
affected.
 
 A
decline in the value of the auction rate securities included in our investments
and an inability to realize proceeds from our auction rate securities right
issued by UBS AG could materially and adversely affect our liquidity and
income.
 
 At
December 31, 2008 and 2009, we held approximately $20.1 million and $19.4
million fair value, respectively, in investments in auction rate securities
(“ARS”) and auction rate securities rights.  The Company purchased all
the ARS it holds from UBS AG (“UBS”).  These ARS represent interests
in collateralized pools of student loan receivables issued by agencies
established by counties, cities, states and other municipal entities within the
United States.  Liquidity for these ARS is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals. In February 2008 and continuing into 2009, these securities failed to
sell at auction.  Holders of the securities continue to receive
interest on the investments, and the securities continue to be auctioned at the
pre-determined intervals (typically every 28 days) until the auction succeeds,
the issuer calls the securities, or they mature. These failed auctions represent
liquidity risk exposure and are not defaults or credit events. A decline in the
value of these securities that is not temporary could materially adversely
affect our liquidity and income.
  24
 
 In
October 2008, we received a non-transferable offer (the “Offer”) from UBS for a
put right (the “ARSR”) permitting us to sell to UBS at par value all ARS
previously purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a commitment to loan us
75% of the UBS-determined value of the ARS at any time until the put is
exercised at a variable interest rate that will equal the lesser of: (i) the
applicable reference rate plus a spread set forth in the applicable credit
agreement and (ii) the then-applicable weighted average interest or dividend
rate paid to the Company by the issuer of the ARS that is pledged to UBS as
collateral. In November 2008, the Company accepted the Offer. In exchange
for the Offer, we provided UBS with a general release of claims (other
than certain consequential damages claims) concerning our ARS and granted UBS
the right to purchase our ARS at any time for full par value.
  Given the
substantial dislocation in the financial markets and among financial services
companies, we cannot assure you that UBS ultimately will have the ability to
repurchase our ARS at par, or at any other price, as these rights will be an
unsecured contractual obligation of UBS, or that if UBS determines to purchase
our ARS at any time, we will be able to reinvest the cash proceeds of any such
sale at the same interest rate or dividend yield currently being paid to us.
Also, as a condition of accepting the ARSR, we were required to sign a release
of claims against UBS, which will prevent us from making claims against UBS
related to our investment in ARS, other than claims for consequential
damages.
 
 Interest
rate fluctuations may adversely affect our income and results of
operations.
 
 As of
December 31, 2009, we had cash, cash equivalents and investments, which include
auction-rate securities and an auction-rate securities right, of $60.1 million
($48.5 million, net of line of credit of $11.6 million). In a declining interest
rate environment, reinvestment typically occurs at less favorable market rates,
negatively impacting future investment income. Accordingly, interest rate
fluctuations may adversely affect our income and results of
operations.
  Our
cash and cash equivalents could be adversely affected by the current downturn in
the financial and credit markets.
 
 We
maintain our cash and cash equivalents with major financial institutions;
however, our cash and cash equivalent balances with these institutions exceed
the Federal Deposit Insurance Corporation insurance limits. While we monitor on
a systematic basis the cash and cash equivalent balances in the operating
accounts and adjust the balances as appropriate, these balances could be
impacted if one or more of the financial institutions with which we deposit our
cash and cash equivalents fails or is subject to other adverse conditions in the
financial or credit markets. To date, we have experienced no loss of principal
or lack of access to our invested cash or cash equivalents; however, we can
provide no assurance that access to our invested cash and cash equivalents will
not be affected if the financial institutions in which we hold our cash and cash
equivalents fail or the financial and credit markets continue to
worsen.
  Declines
in general economic conditions could result in decreased demand for our products
and services, which would adversely affect our business, financial condition and
results of operations.
 
 Our
results of operations are affected by the levels of business activities of our
customers, which can be affected by economic conditions in the United States and
globally.  During periods of economic downturns, our customers may
decrease their demand for wireless technology solutions, as well as the
maintenance, support and consulting services we provide.   As we enter
2010, the U.S. economy continues to experience significant
weakness.  This slowdown may have an adverse effect on the wireless
solutions industry in general and on demand for our products and services, but
the magnitude of that impact is uncertain. Our future growth is dependent, in
part, upon the demand for our products and services. Prolonged weakness in the
economy may cause business enterprises to delay or cancel wireless solutions
projects, reduce their overall wireless solutions budgets and/or reduce or
cancel orders for our services. This, in turn, may lead to longer sales cycles,
delays in purchase decisions, payment and collection issues, and may also result
in price pressures, causing us to realize lower revenues and operating margins.
Additionally, if our customers cancel or delay their wireless solutions
initiatives, our business, financial condition and results of operations could
be materially and adversely affected.
  25
  Provisions
of Delaware law, our charter documents or our shareholder rights plan could
delay or prevent an acquisition of the Company, even if the acquisition would be
beneficial to our stockholders, and could make it more difficult for our
stockholders to change the Company’s management.
 
 Section
203 of the Delaware General Corporation Law prohibits us from engaging in a
business combination with any of our interested stockholders for three years
after such stockholder became an interested stockholder unless certain specified
conditions are met. As a result, these provisions and Delaware law could limit
the price that investors are willing to pay in the future for shares of our
common stock.
 
 In
addition, provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other change in control
that stockholders may consider favorable, including transactions in which
stockholders might otherwise receive a premium for their shares. This is because
these provisions may prevent or frustrate attempts by stockholders to replace or
remove our current management or members of our Board of Directors. These
provisions, among other things:
 
 ·
              permit our Board of Directors to
      issue, without further action by our stockholders, up to 5,000,000 shares
      of preferred stock, with any rights, preferences and privileges as they
      may designate, including the right to approve an acquisition or other
      change in control;
 
 ·
              provide that special meetings of
      stockholders may be called only by (i) our Board of Directors pursuant to
      a resolution adopted by a majority of the entire Board of Directors,
      either upon motion of a director or upon written request by the holders of
      at least 50% of the voting power of all the shares of our capital stock
      entitled to vote in the election of directors, voting as a single class,
      or (ii) our Chairman of the Board or our President;
    and
 
 ·
              require the affirmative vote of
      at least 75% of the voting power of all the shares of our capital stock
      entitled to vote in the election of directors, voting as a single class,
      to amend or repeal the provisions dealing with meetings of
      stockholders.
 
 Also, in
July 2009, we entered into a Rights Agreement, dated as of July 1, 2009 (the
“Rights Agreement”), under which the Board of Directors authorized and declared
a dividend of one preferred stock purchase right (a “Right” and, collectively,
the “Rights”) for each share of the Company’s common stock outstanding as of
July 13, 2009.  Each Right entitles the registered holder to purchase
from the Company one one-thousandth (subject to adjustment) of a share of Series
A Junior Participating Preferred Stock at a price of $19.47, subject to
adjustment. The Rights become exercisable upon the occurrence of certain events
and may make the acquisition of the Company more difficult and expensive. The
Rights Agreement may delay or prevent an acquisition of the Company that
stockholders may consider favorable, which could decrease the value of our
common stock. The Rights will expire upon the earliest to occur
of:  (i) the close of business on the “Sunset Date” (as defined in the
Rights Agreement); (ii) the time at which the Rights are redeemed as provided in
the Rights Agreement; or (iii) the time at which such Rights are exchanged as
provided in the Rights Agreement.
  26
 
 Item 1B.   Unresolved Staff
Comments
 
 None.
 
 Item 2.   Properties
 
 Our
executive and administrative offices are located in Hackensack, New Jersey. In
November 1999, we entered into a lease for this facility, covering approximately
22,500 square feet, that expires on May 31, 2010. The Company is currently in
negotiations to lease new office space. The rent is currently $34,833 per
month.
 
 In
February 2007, we began leasing space in Edgewater, New Jersey. The lease
expires in February 2011 and the rent is currently $1,995 per
month.
 
 In March
2007, we entered into a lease for office space located in Suwanee, Georgia, for
sales, marketing and customer service. The current six- month renewal option
lease extension expired in September 2008 and was subsequently renewed until
March 2010.  The Company expects to lease this office on a
month-to-month basis.  The rent is currently $1,815 per
month.
 
 In
September 2007, we entered into a lease for warehouse space located in Clifton,
New Jersey. The lease expired in September 2008 and automatically renews on an
annual basis. The rent is currently $800 per month.
 
 As a
result of the Asset Intelligence acquisition on January 7, 2010, we assumed the
sublease for the Asset Intelligence administrative offices located in Plano,
Texas, which expires on January 18, 2012.  The rent expense per month
for this sublease is $16,229.
 
 We
believe that our existing facilities are adequate for our existing
needs.
 
 Item 3.   Legal Proceedings
 
 As of
March 30, 2010, the Company is not a party to any material pending legal
proceedings.
 
 Item
4.   (Removed and
Reserved)
  27
  PART II.
 
 Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
 
 Market
Information.
 
 Our
common stock is quoted on the NASDAQ Global Market under the symbol “IDSY.” The
following table sets forth the high and low sales price for our common stock as
reported on such quotation system for each fiscal quarter during the years ended
December 31, 2008 and 2009.
  Quarter
      Ended
                        
                        High
                        
                        
                        Low2008March
      31, 2008
                        
                        $
                        12.94
                        
                        
                        $
                        5.94June
      30, 2008
                        
                        
                        9.60
                        
                        
                        
                        6.22September
      30, 2008
                        
                        
                        9.31
                        
                        
                        
                        5.50December
      31, 2008
                        
                        
                        8.75
                        
                        
                        
                        2.782009March
      31, 2009
                        
                        $
                        4.20
                        
                        
                        $
                        3.11June
      30, 2009
                        
                        
                        4.14
                        
                        
                        
                        3.23September
      30, 2009
                        
                        
                        4.20
                        
                        
                        
                        3.11December
      31, 2009
                        
                        
                        4.17
                        
                        
                        
                        2.98
 
 Performance
Graph.
  The
following graph shows a five-year comparison of cumulative total shareholder
return for (i) the Company, (ii) the NASDAQ Market Index, (iii) the Morningstar
Communication Equipment Index (the “Morningstar Index”), which consists of 133
publicly traded communication equipment companies, and (iv) the Hemscott
Industry Communication Equipment Group Index (the “Hemscott Index”), which
consists of 136 publicly traded communication equipment
companies.  The Company has used the Hemscott Index as its comparative
industry index in prior years, but will be using the Morningstar Index in future
years, as the Hemscott Index will be replaced with the Morningstar Index, which
is a comparable Morningstar industry index, as a result of Morningstar’s
acquisition of the Hemscott businesses in January 2008.  The Hemscott
Index and the Morningstar Index include most of the same companies.
  The graph
assumes that $100 was invested in each of the Company’s common stock, the NASDAQ
Market Index, the Morningstar Index and the Hemscott Index on December 31,
2004.  Data points on the graph are annual.  Note that
historic stock price performance is not necessarily indicative of future stock
price performance.
  28
 
 
 
 Fiscal
      Year EndedCOMPANY/INDEX/MARKET
                        
                        12/31/2004
                        
                        
                        12/31/2005
                        
                        
                        12/31/2006
                        
                        
                        12/31/2007
                        
                        
                        12/31/2008
                        
                        
                        12/31/2009I.D.
      Systems, Inc.
                        
                        
                        100.00
                        
                        
                        
                        127.81
                        
                        
                        
                        100.86
                        
                        
                        
                        66.77
                        
                        
                        
                        21.70
                        
                        
                        
                        17.20NASDAQ
      Market Index
                        
                        
                        100.00
                        
                        
                        
                        102.20
                        
                        
                        
                        112.68
                        
                        
                        
                        124.57
                        
                        
                        
                        74.71
                        
                        
                        
                        108.56Morningstar
      Industry Index
                        
                        
                        100.00
                        
                        
                        
                        111.12
                        
                        
                        
                        117.79
                        
                        
                        
                        125.01
                        
                        
                        
                        67.25
                        
                        
                        
                        65.48Hemscott
      Group
                        
                        
                        100.00
                        
                        
                        
                        115.06
                        
                        
                        
                        119.48
                        
                        
                        
                        127.81
                        
                        
                        
                        66.44
                        
                        
                        
                        64.75
 29
  Holders.
 
 As of
March 25, 2010, there were 27 holders of record of our common
stock.
 
 Dividends.
 
 We have
never paid a cash dividend on our common stock and do not expect to pay a cash
dividend in the near future. We currently intend to retain future earnings, if
any, to finance our operations and expand our business. Any future determination
to pay cash dividends will be at the discretion of our Board of Directors and
will depend upon our financial condition, operating results, capital
requirements and any other factors our Board of Directors deems relevant. In
addition, our agreements with our lenders may, from time to time, restrict our
ability to pay dividends.
 
 Sales of Unregistered
Securities.
 
 None.
 
 Purchases of Equity
Securities by the Issuer.
 
 On May 3,
2007, we announced that our Board of Directors had authorized the repurchase of
issued and outstanding shares of our common stock having an aggregate value of
up to $10,000,000 pursuant to a share repurchase program established under Rule
10b-18 of the Exchange Act. The amount and timing of such repurchases are
dependent upon the price and availability of shares, general market conditions
and the availability of cash, as determined in the discretion of our management.
The repurchases are funded from our working capital. Our share repurchase
program does not have an expiration date, and we may discontinue or suspend the
share repurchase program at any time. All of the repurchases set forth in this
table were made under the share repurchase program in open market transactions.
All shares of common stock repurchased under our share repurchase program are
held as treasury stock. As of December 31, 2009, the Company has purchased
approximately 1,075,000 shares of its common stock in open market transactions
under the stock repurchase program for an aggregate purchase price of
approximately $9,970,000.
 
 The
Company did not purchase any shares of its common stock under the repurchase
program during the year ended December 31, 2009.
  30
 
 Item 6. Selected Financial
Data
 
 The
following table sets forth selected financial data for each of the five years
ended December 31, 2009 derived from our audited financial statements. You
should read the information in the table below together with the section of this
Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” which discusses the 2007, 2008
and 2009 fiscal years, and our financial statements and related notes and the
other financial data included elsewhere in this Annual Report on Form
10-K.
 
 Year
      Ended December 31,2005
                            
                            
                            2006
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2009Statement
      of Operations Data:Revenues
                            
                            $
                            19,004,000
                            
                            
                            $
                            24,740,000
                            
                            
                            $
                            17,083,000
                            
                            
                            $
                            27,046,000
                            
                            
                            $
                            10,316,000Cost
      of revenues
                            
                            
                            9,708,000
                            
                            
                            
                            13,701,000
                            
                            
                            
                            8,929,000
                            
                            
                            
                            13,466,000
                            
                            
                            
                            5,554,000Gross
      profit
                            
                            
                            9,296,000
                            
                            
                            
                            11,039,000
                            
                            
                            
                            8,154,000
                            
                            
                            
                            13,580,000
                            
                            
                            
                            4,762,000Operating
      expenses:Selling,
      general and administrative expenses
                            
                            
                            7,140,000
                            
                            
                            
                            12,943,000
                            
                            
                            
                            15,963,000
                            
                            
                            
                            16,760,000
                            
                            
                            
                            16,543,000Research
      and development expenses
                            
                            
                            1,625,000
                            
                            
                            
                            2,639,000
                            
                            
                            
                            2,849,000
                            
                            
                            
                            2,883,000
                            
                            
                            
                            2,604,000Income
      (loss) from operations
                            
                            
                            531,000
                            
                            
                            
                            (4,543,000
                            )
                            
                            
                            (10,658,000
                            )
                            
                            
                            (6,063,000
                            )
                            
                            
                            (14,385,000
                            )Interest
      income
                            
                            
                            222,000
                            
                            
                            
                            2,801,000
                            
                            
                            
                            3,238,000
                            
                            
                            
                            2,226,000
                            
                            
                            
                            933,000Interest
      expense
                            
                            
                            (53,000
                            )
                            
                            
                            (29,000
                            )
                            
                            
                            (10,000
                            )
                            
                            
                            -
                            
                            
                            
                            (130,000
                            )Other
      income (loss)
                            
                            
                            151,000
                            
                            
                            
                            155,000
                            
                            
                            
                            89,000
                            
                            
                            
                            (338,000
                            )
                            
                            
                            390,000Net
      income (loss)
                            
                            $
                            851,000
                            
                            
                            $
                            (1,616,000
                            )
                            
                            $
                            (7,341,000
                            )
                            
                            $
                            (4,175,000
                            )
                            
                            $
                            (13,192,000
                            )Net
      income (loss) per share - basic
                            
                            $
                            0.11
                            
                            
                            $
                            (0.15
                            )
                            
                            $
                            (0.66
                            )
                            
                            $
                            (0.38
                            )
                            
                            $
                            (1.20
                            )Net
      income (loss) per share - diluted
                            
                            $
                            0.09
                            
                            
                            $
                            (0.15
                            )
                            
                            $
                            (0.66
                            )
                            
                            $
                            (0.38
                            )
                            
                            $
                            (1.20
                            )Weighted
      average common shares outstanding - basic
                            
                            
                            7,771,000
                            
                            
                            
                            10,501,000
                            
                            
                            
                            11,205,000
                            
                            
                            
                            10,887,000
                            
                            
                            
                            10,991,000Weighted
      average common shares outstanding - diluted
                            
                            
                            9,332,000
                            
                            
                            
                            10,501,000
                            
                            
                            
                            11,205,000
                            
                            
                            
                            10,887,000
                            
                            
                            
                            10,991,000Balance
      Sheet Data (at end of period):Cash
      and cash equivalents
                            
                            
                            2,138,000
                            
                            
                            
                            9,644,000
                            
                            
                            
                            5,103,000
                            
                            
                            
                            12,558,000
                            
                            
                            
                            19,481,000Investments
                            
                            
                            5,463,000
                            
                            
                            
                            60,716,000
                            
                            
                            
                            59,900,000
                            
                            
                            
                            43,461,000
                            
                            
                            
                            40,661,000Total
      assets
                            
                            
                            19,840,000
                            
                            
                            
                            84,905,000
                            
                            
                            
                            74,796,000
                            
                            
                            
                            69,948,000
                            
                            
                            
                            70,575,000Long-term
      debt
                            
                            
                            449,000
                            
                            
                            
                            240,000
                            
                            
                            
                            19,000
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      stockholders’ equity
                            
                            
                            15,166,000
                            
                            
                            
                            81,284,000
                            
                            
                            
                            71,670,000
                            
                            
                            
                            67,085,000
                            
                            
                            
                            55,881,000
 31
  Item 7.   Management’s Discussion and Analysis
of Financial Condition and Results of Operations
 
 The
following discussion is intended to assist you in understanding our financial
condition and results of operations and should be read in conjunction with the
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K. Many of the amounts and percentages in this section have been
rounded for convenience of presentation, but actual recorded amounts have been
used in computations. Accordingly, some information may appear not to compute
accurately.
 
 Overview
 
 We
develop, market and sell wireless solutions for managing and securing high-value
enterprise assets. These assets include industrial vehicles, such as forklifts
and airport ground support equipment, and rental vehicles. Our patented wireless
asset management system technology, addresses the needs of organizations to
control, track, monitor and analyze their assets. Our solutions enable our
customers to achieve tangible economic benefits by making timely, informed
decisions that increase the security, productivity and efficiency of their
operations.
 
 We have
focused our business activities on two primary applications: (i) industrial
fleet management and security and (ii) rental fleet management. Our solution for
industrial fleet management and security allows our customers to reduce
operating costs and capital expenditures and to comply with certain safety
regulations by accurately and reliably measuring and controlling fleet activity.
This solution also enhances security at industrial facilities and areas of
critical infrastructure, such as airports, by controlling access to, and
restricting the use of, vehicles and equipment. Our solution for traditional
rental fleet management allows rental car companies to generate higher revenue
by more accurately tracking vehicle data, such as fuel consumption and odometer
readings, and improve customer service by expediting the rental and return
processes. . We also provide a solution for the relatively new concept of
“carsharing,” enabling a rental car company to (i) position vehicles
strategically around cities, universities and corporate campuses, (ii) control
vehicles remotely, (iii) manage member reservations by phone or Internet, and
(iv) charge members for vehicle use by the hour.
  In
addition to focusing on these core applications, we have adapted, and intend to
continue to adapt, our solutions to meet our customers’ broader asset management
needs.
  We sell
our system to both executive and division-level management. Typically, our
initial system deployment serves as a basis for potential expansion across the
customer’s organization. We work closely with customers to help maximize the
utilization and benefits of our system and demonstrate the value of
enterprise-wide deployments.
 
 We market
and sell our solutions to a wide range of customers in the commercial and
government sectors. Our customers operate in diverse markets, such as automotive
manufacturing, heavy industry, retail and wholesale distribution, aerospace and
defense, homeland security and vehicle rental.
 
 We have
incurred net losses of approximately $7.3 million $4.2 million and $13.2 million
for the years ended December 31, 2007, 2008 and 2009, respectively, and have
incurred additional net losses since inception. At December 31, 2009, we had an
accumulated deficit of approximately $36.9 million.
 
 During
the year ended December 31, 2009, we generated revenues of $10.3 million and the
U.S. Postal Service, Wal-Mart Stores, NACCO Materials Handling Group, Inc. and
Ford Motor Company accounted for 20%, 15%, 15%, and 14% of our revenues,
respectively.  During the year ended December 31, 2008, we generated
revenues of $27.0 million, and the U.S. Postal Service and Wal-Mart Stores, Inc.
accounted for 42% and 41% of our revenues, respectively. During the year ended
December 31, 2007, we generated revenues of $17.1 million, and the U.S. Postal
Service, Wal-Mart Stores, Inc. and Ford Motor Company accounted for 37%, 32% and
10% of our revenues, respectively. Both revenues and earnings for 2009 were
adversely impacted by lower demand for our products as a result of a spending
freeze by the U. S. Postal Service and the slowdown in the U.S.
economy.
  32
  We are
highly dependent upon sales of our system to a few customers. The loss of any of
these key customers, or any material reduction in the amount of our products
they purchase during a particular period, could materially and adversely affect
our revenues for such period. Conversely, a material increase in the amount of
our products purchased by a key customer (or customers) during a particular
period could result in a significant increase in our revenues for such period,
and such increased revenues may not recur in subsequent periods.  Some
of these key customers, as well as other customers of the Company, operate in
markets that have suffered business downturns in the past few years or may so
suffer in the future, particularly in light of the current global economic
downturn, and any material adverse change in the financial condition of such
customers could materially and adversely affect our financial condition and
results of operations. If we are unable to replace such revenue from existing or
new customers, the market price of our common stock could decline
significantly.
  We expect
that customers who utilize our solutions will do so as part of a large-scale
deployment of these solutions across multiple or all divisions of their
organizations. A customer’s decision to deploy our solutions throughout its
organization will involve a significant commitment of its resources.
Accordingly, initial implementations may precede any decision to deploy our
solutions enterprise-wide. Throughout this sales cycle, we may spend
considerable time and expense educating and providing information to prospective
customers about the benefits of our solutions.
  The
timing of the deployment of our solutions may vary widely and will depend on the
specific deployment plan of each customer, the complexity of the customer’s
organization and the difficulty of such deployment. Customers with substantial
or complex organizations may deploy our solutions in large increments on a
periodic basis. Accordingly, we may receive purchase orders for significant
dollar amounts on an irregular and unpredictable basis. Because of our limited
operating history and the nature of our business, we cannot predict the timing
or size of these sales and deployment cycles. Long sales cycles, as well as our
expectation that customers will tend to place large orders sporadically with
short lead times, may cause our revenues and results of operations to vary
significantly and unexpectedly from quarter to quarter.
  Our
ability to increase our revenues and generate net income will depend on a number
of factors, including our ability to:
 
 ·
              increase sales of products and
      services to our existing
customers;
 
 ·
              convert our initial programs into
      larger or enterprise-wide purchases by our
    customers;
 
 ·
              increase market acceptance and
      penetration of our products;
and
 
 ·
              develop and commercialize new
      products and technologies.
 
 On
January 7, 2010, we acquired the Asset Intelligence business unit of General
Electric Company, which provides trailer and container tracking solutions for
manufacturers, retailers, shippers and freight transportation
providers.  The focus of Asset Intelligence on trucking, rail, marine
and intermodal applications expands the scope of assets addressed by I.D.
Systems’ solutions, and the web and mobile
communications technologies of Asset Intelligence are complementary to I.D.
Systems’ portfolio of wireless asset management patents. The Asset Intelligence
business complements the Company’s existing businesses with the focus of Asset
Intelligence on trucking, rail, marine and intermodal applications significantly
expands the scope of assets addressed by the Company’s product
solutions.
 
 Asset
Intelligence has long-term communication contracts that provide us with a
recurring revenue stream which is expected to help reduce quarterly revenue
volatility. We expect that Asset Intelligence will contribute $12 - $15 million
to our U.S. GAAP revenue for 2010, including approximately $11 million from
recurring services. We expect the combined gross margins to remain consistent
with our historical gross margins.  We have already achieved synergies
integrating the Asset Intelligence unit into the business and we expect to
reduce annual combined operating expenses by approximately $8 million. We expect
the annual operating expenses of the combined businesses to be approximately $22
million.
 
 Critical
Accounting Policies And Estimates
 
 We have
adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States in the preparation of our
financial statements. Our significant accounting policies are described in Note
B to our consolidated financial statements included in this Annual Report on
Form 10-K. Certain accounting policies involve significant judgments and
assumptions by our management that can have a material impact on the carrying
value of certain assets and liabilities. We consider such accounting policies to
be our critical accounting policies. The judgments and assumptions used by our
management in these critical accounting policies are based on historical
experience and other factors that our management believes to be reasonable under
the circumstances. Because of the nature of these judgments and assumptions,
actual results could differ significantly from these judgments and estimates,
which could have a material impact on the carrying values of our assets and
liabilities and our results of operations. Our critical accounting policies are
described below.
  33
 
 Revenue Recognition
 
 We derive
our revenues from: (i) sales of our wireless asset management system, which
includes training and technical support; (ii) post-contract maintenance and
support agreements; and (iii) periodically, from leasing arrangements. Our
system consists of on-asset hardware, communication infrastructure and software.
Revenue is allocated to each element based upon vendor specific objective
evidence (VSOE) of the fair value of the element. VSOE of the fair value is
based upon the price charged when the element is sold separately. Revenue from
the sale of our system is recognized as the element is earned based on the
selling price of each element and when there are no undelivered elements that
are essential to the functionality of the delivered elements. Our system is
typically implemented by the customer or a third party and, as a result,
revenues are recognized when title and risk of loss passes to the customer,
which usually is upon delivery of the system, pervasive evidence of an
arrangement exists, sales price is fixed and determinable, collectability is
reasonably assured and contractual obligations have been satisfied. In some
instances, we are also responsible for providing installation services. The
additional installation services, which could be performed by third parties, are
considered another element in a multi-element deliverable and revenue for
installation services is recognized at the time the installation is provided.
Revenues from training and technical support are recognized as such services are
provided.
 
 We also
enter into post-contract maintenance and support agreements. Revenues are
recognized over the service period and the cost of providing these services is
expensed as incurred.
 
 Stock-Based
Compensation
 
 We
account for stock-based employee compensation for all share-based payments,
including grants of stock options, as an operating expense, based on their fair
values on grant date.  The Company recorded stock based compensation
expense of $3,288,000, $2,989,000 and $2,157,000 for the years ended December
31, 2007, 2008 and 2009, respectively.
  We
estimate the fair value of share-based payment awards on the grant date using an
option pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service period our
consolidated statement of operations.  We estimate forfeitures at the
time of grant in order to estimate the amount of share based awards that will
ultimately vest. The estimate is based on our historical rates of forfeitures.
Estimated forfeitures are revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
 
 Long-lived
Assets
  Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to the future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets and would be charged
to earnings.
 
 Goodwill
and Other Intangible Assets
 
 Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses.  Goodwill and intangible assets deemed to have
indefinite lives are not amortized.  Intangible are amortized over
their useful lives unless the lives are determined to be
indefinite.  Intangible assets are carried at cost, less accumulated
amortization. Intangible assets consist of trademarks, customer relationships
and other intangible assets.  We test goodwill and other intangible
assets to determine if impairment exists and if the use of indefinite lives is
currently applicable.
  34


Income
taxes





We use
the asset and liability method of accounting for deferred income taxes. Deferred
income taxes are measured by applying enacted statutory rates to net operating
loss carryforwards and to the differences between the financial reporting and
tax bases of assets and liabilities. Deferred tax assets are reduced, if
necessary, by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.




Fair
Value Measurements




In determining fair value
of financial instruments, we utilizea fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those
levels:




§
            Level
      1: Unadjusted quoted prices in active markets for identical assets or
      liabilities.





§
            Level
      2: Inputs other than quoted prices that are observable for the asset or
      liability, either directly or indirectly. These include quoted prices for
      similar assets or liabilities in active markets and quoted prices for
      identical or similar assets or liabilities in markets that are not
      active.





§
            Level
      3: Unobservable inputs that reflect the reporting entity’s own
      assumptions.





The fair
value of the auction-rate securities, or ARS, held by the Company was determined
utilizing discounted cash flow approach and market evidence with respect to the
ARS’ collateral, ratings and insurance to assess default risk, credit spread
risk and downgrade risk.  Our fair value
measurements for our financial instruments, such as our investments in
auction-rate securities, are subjective and involve uncertainties and matters of
significant judgment.The fair value of the ARSR was based on an approach
in which the present value of all expected future cash flows was subtracted from
the current fair market value of the security and the resultant value was
calculated as a future value at an interest rate reflective of counterparty
risk. Changes in
assumptions could significantly affect our estimates.





Results
of Operations





The
following table sets forth certain items related to our statement of operations
as a percentage of revenues for the periods indicated and should be read in
conjunction with our financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K. A detailed discussion of the
material changes in our operating results is set forth below.





Year
      Ended December 31,2007
                              
                              
                              2008
                              
                              
                              2009Revenues:Products
                              
                              
                              64.6
                              %
                              
                              
                              74.2
                              %
                              
                              
                              62.7
                              %Services
                              
                              
                              35.4
                              
                              
                              
                              25.8
                              
                              
                              
                              37.3100.0
                              
                              
                              
                              100.0
                              
                              
                              
                              100.0Cost
      of Revenues:Cost
      of products
                              
                              
                              34.3
                              
                              
                              
                              37.0
                              
                              
                              
                              37.6Cost
      of services
                              
                              
                              18.0
                              
                              
                              
                              12.8
                              
                              
                              
                              16.2Total
      Gross Profit
                              
                              
                              47.7
                              
                              
                              
                              50.2
                              
                              
                              
                              46.2Selling,
      general and administrative expenses
                              
                              
                              93.4
                              
                              
                              
                              62.0
                              
                              
                              
                              160.4Research
      and development expenses
                              
                              
                              16.7
                              
                              
                              
                              10.7
                              
                              
                              
                              25.2Loss
      from operations
                              
                              
                              (62.4
                              )
                              
                              
                              (22.4
                              )
                              
                              
                              (139.4
                              )Interest
      income
                              
                              
                              19.0
                              
                              
                              
                              8.2
                              
                              
                              
                              9.0Interest
      expense
                              
                              
                              (0.1
                              )
                              
                              
                              —
                              
                              
                              
                              (1.3
                              )Other
      income (loss)
                              
                              
                              0.5
                              
                              
                              
                              (1.2
                              )
                              
                              
                              3.8Net
      loss
                              
                              
                              (43.0
                              )%
                              
                              
                              (15.4
                              )%
                              
                              
                              (127.9
                              )%


35


Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008




REVENUES. Revenues decreased
by $16.7 million, or 61.9%, to $10.3 million in 2009 from $27.0 million in
2008.  The decrease in revenues was primarily attributable to the
decrease in revenue from the U.S. Postal Service in the amount of $9.3 million
due to a spending freeze and from Wal-Mart Stores, Inc. in the amount of $9.6
million, partially offset in increases in revenue from Ford Motor Company of
$0.9 million, NACCO Materials Handling Group, Inc. of $1.0 million and American
Eagle Airlines of $0.7 million.




Revenues
from products decreased by $13.6 million, or 67.8%, to $6.5 million in 2009 from
$20.1 million in 2008. The decrease in revenues was primarily attributable to
the decrease in revenue from the U.S. Postal Service and from Wal-Mart Stores,
Inc. noted above.




Revenues
from services decreased by $3.1 million, or 44.9%, to $3.8 million in 2009 from
$6.9 million in 2008. The decrease in service revenue is primarily attributable
to a decrease in the amount of services rendered to the U.S. Postal Service to a
spending freeze and Wal-Mart Stores, Inc., as noted above.




COST OF REVENUES. Cost of
revenues decreased by $7.9 million, or 58.8%, to $5.6 million in 2009 from $13.5
million in 2008. The decrease was attributable to the decrease in revenue in
2009. Gross profit was $4.8 million in 2009 compared to $13.6 million in 2008.
As a percentage of revenues, gross profit decreased to 46.2% in 2009 from 50.2%
in 2008.




Cost of
products decreased by $6.1 million, or 61.2%, to $3.9 million in 2009 from $10.0
million in 2008. Gross profit for products was $2.6 million in 2009 compared to
$10.1 million in 2008. As a percentage of product revenues, gross profit
decreased to 40.0% in 2009 from 50.2% in 2008. The decrease in gross profit was
primarily due to a $0.6 million charge for inventory obsolescence.




Cost of
services decreased by $1.8 million, or 51.8%, to $1.7 million in 2009 from $3.5
million in 2008. Gross profit for services was $2.2 million in 2009 compared to
$3.5 million in 2008. As a percentage of service revenues, gross profit
increased to 56.5% in 2009 from 50.2% in 2008. The gross margin increase was due
to a mix in service revenue. During 2008, a higher percentage of our service
revenue was for vehicle and infrastructure installations for the U.S. Postal
Service. Those services are performed by subcontractors and have lower gross
margins than training and support services performed by our own field staff.
Maintenance revenue, which has higher margins, also increased by $568,000, or
77%, in 2009 compared to 2008.





SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Selling, general and administrative expenses decreased
$217,000, or 1.3%, to $16.5 million in 2009 compared to $16.8 million in 2008.
This decrease was primarily attributable to decreases in non-payroll selling
expenses of $428,000, recruiting costs of $110,000, bonuses of $184,000,
commissions of $330,000, travel and entertainment expenses of $114,000,
stock-based compensation of $713,000 and payroll related expenses of $277,000,
as a result of staff reductions in April 2009, no management incentive
compensation and cost reduction initiatives partially offset by increases in
acquisition costs of $1.3 million and other professional fees of $651,000. As a
percentage of revenues, selling, general and administrative expenses increased
to 160.4% in 2009 from 62.0% in 2008 due to a decrease in revenue.




RESEARCH AND DEVELOPMENT
EXPENSES. Research and development expenses decreased $279,000, or 9.7%,
to $2.6 million in 2009 from $2.9 million in 2008. The decrease was primarily
attributable to decreases in payroll-related and stock compensation expenses
of   $333,000, offset by an increase in consulting expenses of
$113,000.  As a percentage of revenues, research and development
expenses increased to 25.2% in 2009 from 10.7% in 2008 due primarily to a
decrease in revenue in 2009 in comparison to 2008, as discussed
above.





INTEREST INCOME. Interest
income decreased $1,293,000, or 58.1%, to $933,000 in 2009 from $2.2 million in
2008. This decrease was attributable primarily to the decrease in interest rates
earned on the Company’s investments.





INTEREST EXPENSE
Interest expense increased by $130,000 in 2009 from $0 in 2008. This increase
was due to interest expense incurred on the Company’s line of credit borrowing
facility which was not in place during 2008.




OTHER INCOME. Other income of
$390,000 in 2009 principally reflects the change in the fair value of the
Company’s investment in auction rate securities and the auction rate securities
right.




NET LOSS. Net loss was $13.2
million, or $(1.20) per basic and diluted share, in 2009 as compared to net loss
of $4.2 million, or $(0.38) per basic and diluted share, in 2008. The increase
in net loss was due primarily to the reasons described above.


36


Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007





REVENUES. Revenues increased
by $9.9 million, or 58.3%, to $27.0 million in 2008 from $17.1 million in
2007.





Revenues
from product increased by $9.0 million, or 81.9%, to $20.0 million in 2008 from
$11.0 million in 2007. The increase in product revenue was primarily
attributable to an increase in product revenue from the U.S. Postal Service and
Wal-Mart Stores, Inc.





Revenues
from service increased $928,000, or 15.3%, to $6.9 million in 2008 from $6.0
million in 2007. The increase in revenues was primarily attributable to an
increase in service revenue from the U.S. Postal Service.





COST OF REVENUES. Cost of
revenues increased by $4.5 million, or 50.8%, to $13.4 million in 2008 from $8.9
million in 2007. Gross profit was $13.6 million in 2008 compared to $8.2 million
in 2007. As a percentage of revenues, gross profit increased to 50.2% in 2008
from 47.7% in 2007.





Cost of
product increased by $4.1 million, or 70.6%, to $10.0 million in 2008 from $5.9
million in the same period in 2007. Gross profit from product revenue was $10.0
million in 2008 compared to $5.2 million in 2007. As a percentage of product
revenues, gross profit increased to 50.2% in 2008 from 46.9% in 2007. The
increase in gross profit is primarily attributable to a lesser amount reserved
for inventory obsolescence in 2008 as compared to 2007. The amount of inventory
identified as obsolete and therefore charged to cost of product was $517,000 in
2007 and $126,000 in 2008.




Cost of
service increased by $400,000, or 13.0%, to $3.5 million in 2008 from $3.1
million in the same period in 2007. Gross profit from service revenue was $3.5
million in 2008 compared to $3.0 million in 2007. As a percentage of service
revenues, gross profit slightly increased to 50.2% in 2008 from 49.2% in 2007.
The increase was marginal and was attributed to increased service revenue, in
general.





SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Selling, general and administrative expenses increased by
$797,000, or 5.0%, to $16.8 million in 2008 compared to $16.0 million in 2007.
This increase was attributable primarily to (i) the increase in payroll and
related costs of approximately $661,000, primarily resulting from the hiring of
additional staff within our sales and customer service departments, and (ii) an
increase in insurance expense of approximately $183,000 in 2008. As a percentage
of revenues, selling, general and administrative expenses decreased to 62.0% in
2008 from 93.4% in 2007 due to an increase in revenue, partially offset by the
aforementioned increase to payroll and payroll-related expenses.





RESEARCH AND DEVELOPMENT
EXPENSES.
Research and development expenses were nearly flat with a minor increase of
$34,000, or 1.2%, to $2.9 million in 2008 from $2.8 million in 2007. As a
percentage of revenues, research and development expenses decreased to 10.7% in
2008 from 16.7% in 2007 due to an increase in revenue.





INTEREST INCOME. Interest income decreased
$1.0 million, or 31.2%, to $2.2 million in 2008 from $3.2 million in 2007. This
decrease was attributable to the decrease in interest rates as well as a
decrease in the amount of cash, cash equivalents and investments in
2008.





INTEREST EXPENSE. Interest expense decreased
$10,000 to $0 in 2008 from $10,000 in 2007. The decrease was attributable to the
payoff of our outstanding debt in February 2008.





OTHER INCOME (LOSS). Other loss of $338,000 in
2008 reflects a charge to operations related to our auction rate securities and
auction rate securities right as disclosed in Note C of the financial statements
included in this Annual Report on Form 10-K. Other income of $89,000 in 2007
reflects rental income earned from a sublease arrangement. In July 2007, we
released the sub-lessee from the sublease and reassumed the space.




NET LOSS. Net loss was $4.2 million,
or $(0.38) per basic and diluted share, for the year ended December 31, 2008, as
compared to net loss of $7.3 million, or $(0.66) per basic and diluted share,
for the year ended December 31, 2007. The decrease in net loss was due primarily
to the reasons described above with emphasis on the increase in revenue and an
improvement in the gross profit percentage.


37


Liquidity
and Capital Resources





Historically,
except for our line of credit borrowing of $12.9 million in the first quarter of
2009, our capital requirements have been funded primarily from the net proceeds
from the issuance of our securities, including the issuance of our common stock
upon the exercise of options and warrants. As of December 31, 2009, we had cash
and marketable securities, which include auction rate securities and auction
rate securities rights, of $60.1 million and working capital of $47.7 million,
compared to cash and marketable securities of $56.0 million and working capital
of $30.9 million as of December 31, 2008.





At
December 31, 2008 and 2009, we held approximately $20.1 million and $19.4
million fair value, respectively, in investments in auction rate securities
(“ARS”) and auction rate securities rights.  The Company purchased all
the ARS it holds from UBS AG (“UBS”).  These ARS represent interests
in collateralized pools of student loan receivables issued by agencies
established by counties, cities, states and other municipal entities within the
United States.  Liquidity for these ARS is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals. In February 2008 and continuing into 2009 , these
securities  failed to sell at auction.  Holders of the
securities continue to receive interest on the investments, and the securities
continue to be auctioned at the pre-determined intervals (typically every 28
days) until the auction succeeds, the issuer calls the securities, or they
mature. These failed auctions represent liquidity risk exposure and are not
defaults or credit events. A decline in the value of these securities that is
not temporary could materially adversely affect our liquidity and
income.




In
October 2008, we received a non-transferable offer (the “Offer”) from UBS for a
put right (the “ARSR”) permitting us to sell to UBS at par value all ARS
previously purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a commitment to loan us
75% of the UBS-determined value of the ARS at any time until the put is
exercised at a variable interest rate that will equal the lesser of: (i) the
applicable reference rate plus a spread set forth in the applicable credit
agreement and (ii) the then-applicable weighted average interest or dividend
rate paid to the Company by the issuer of the ARS that is pledged to UBS as
collateral. In November 2008, the Company accepted the Offer. In exchange
for the Offer, we provided UBS with a general release of claims (other
than certain consequential damages claims) concerning our ARS and granted UBS
the right to purchase our ARS at any time for full par value. Our right under
the Offer is in substance a put right (with the strike price equal to the par
value of the ARS) which we recorded as an asset, measured at its fair value with
the resultant gain recognized in earnings. We initially recorded the put right
at a fair value of $2.0 million and recognized the gain and a $2.3 million loss
in the fair value of the ARS in operations. As we have classified the ARS as
trading securities, the change in fair value of the ARS is charged to
operations. The unrealized (loss) gain charged to operations in 2008 and 2009
was $(338,000) and $338,000, respectively, which is included in other expense.
The fair value of the put right was based on an approach in which the present
value of all expected future cash flows were subtracted from the current fair
market value of the security and the resultant value was calculated as a future
value at an interest rate reflective of counterparty risk.





Given the
substantial dislocation in the financial markets and among financial services
companies, we cannot assure you that UBS ultimately will have the ability to
repurchase our auction rate securities at par, or at any other price, as these
rights will be an unsecured contractual obligation of UBS or that if UBS
determines to purchase our ARS at any time, we will be able to reinvest the cash
proceeds of any such sale at the same interest rate or dividend yield currently
being paid to us. Also, as a condition of accepting the ARSR, we were required
to sign a release of claims against UBS, which will prevent us from making
claims against UBS related to our investment in ARS, other than claims for
consequential damages.





Business
Acquisition





On April
18, 2008, we acquired the assets of PowerKey, the industrial vehicle monitoring
products division of International Electronics, Inc., a manufacturer of access
control and security equipment, for approximately $573,000, which includes
approximately $73,000 of direct acquisition costs. The tangible assets acquired
include inventory (totaling approximately $191,000) and fixed assets (totaling
approximately $4,000).





Allocation
of the purchase price of the intangible assets consists of the following:
goodwill (totaling approximately $200,000), trademarks and trade names (totaling
approximately $74,000), and a customer list (totaling approximately
$104,000).


38


On October 19, 2009, the Company acquired Didbox
Ltd. (“Didbox”), a privately held manufacturer and marketer of vehicle
operator identification systems based in the United Kingdom (“UK”). The
transaction was valued at approximately $660,000 and was structured with
$534,000 paid up front in cash and contingent consideration of $110,000 due in
12 months based upon achievement of certain revenue and operating profit
targets. The potential undiscounted amount of all future payments that could be
required to be paid under the contingent consideration arrangement is between
$99,000 and $110,000.  The Company incurred acquisition-related
expenses of approximately $43,000, which are included in selling, general and
administrative expenses in the consolidated statement of operations for the year
ended December 31, 2009. The Didbox business compliments the Company’s existing
businesses with access to OEM dealer network in the UK, and the ability to add
the I.D. Systems solution set to its product line.  In addition, the
acquisition is expected to provide the Company with access to a broader base of
customers in Europe.







The
assets and liabilities of the acquired businesses are accounted for under the
purchase method of accounting and recorded at their estimated fair values at the
dates of acquisition.  The excess of the purchase price over the
estimated fair values of the net assets acquired was recorded as
goodwill.  The goodwill is not expected to be deductible for tax
purposes.  Allocation of the Didbox purchase price consists of the
following:





Current
      assets
                        
                        $
                        93,000Other
      assets
                        
                        
                        36,000Current
      liabilities
                        
                        
                        (104,000
                        )Goodwill
                        
                        
                        419,000Trademarks
      and tradenames
                        
                        
                        61,000Customer
      list
                        
                        
                        56,000Other
      intangibles
                        
                        
                        83,000Fair
      value of assets acquired
                        
                        $
                        644,000





The fair
value of the current assets acquired includes trade accounts receivables with a
fair value of $56,000.  The gross amount due is $56,000, which is
expected to be collected.  The results of operations of acquired
businesses have been included in the consolidated statement of operations as of
the effective date of acquisition.  Pro forma results of operations
have not been presented because the effects of the acquisitions were not
material.





On
January 7, 2010, the Company entered into a Membership Interest Purchase
Agreement (the “Purchase Agreement”) with General Electric Capital Corporation
(“GECC”) and GE Asset Intelligence, LLC (“ GEAI ”), pursuant to which the
Company acquired GEAI’s telematics business (the “GEAI Business”) through the
purchase of 100% of the membership interests of Asset Intelligence, LLC (“AI”),
a newly formed, wholly owned subsidiary of GEAI into which substantially all of
the assets, including intellectual property, and liabilities of the GEAI
Business had been transferred immediately prior to the
closing.  Effective with the closing of the transaction on January 7,
2010, AI became a wholly owned subsidiary of the Company.  In
connection with the transaction, AI offered employment to all of the former
employees of the GEAI Business. The AI business compliments the Company’s
existing businesses, as AI’s focus on trucking, rail, marine and intermodal
applications significantly expands the scope of assets addressed by I.D.
Systems’ product solutions.  In addition, the acquisition is expected
to provide the Company with access to a broader base of customers.





AI
combines web-based software technologies with satellite and cellular
communications to deliver data-driven telematics solutions for supply chain
asset management.  These solutions help secure and optimize the performance
of trailers, railcars, containers, and the freight they carry, enabling shippers
and carriers to maximize security and efficiency throughout their supply
chains.




AI’s
VeriWiseTM product platform provides comprehensive real-time data for faster,
more informed decision-making in multiple supply chain
applications:




·
            Asset
      Optimization—combining web-based asset visibility and advanced telemetry
      data to monitor the condition of fleet assets, streamline asset
      deployment, optimize utilization, and maximize return on
      investment.




·
            Cold
      Chain Management—maintaining the condition and quality of
      temperature-sensitive cargo from point A to point B, and all the points in
      between.




·
            Fleet
      Maintenance—utilizing sensor technologies, real-time data and a wealth of
      transportation maintenance knowledge to help control maintenance costs,
      improve preventative maintenance practices, increase asset up-time, extend
      asset life, and reduce overall cost of
  ownership.




·
            Fuel
      Management—monitoring key factors in fuel consumption, such as tire
      pressure and engine idle time, to help optimize fuel performance and
      reduce transportation costs.




·
            Security
      & Safety—protecting valuable assets and cargo throughout the supply
      chain.




39


Under the
terms of the Purchase Agreement, the Company paid consideration of $15 million
in cash at closing.  In addition, the Company may be required to pay
additional cash consideration of up to $2 million in or about February 2011,
contingent upon the number of new units of telematics equipment sold
or subject to a binding order to be sold by AI during the year ending
December 31, 2010.  The purchase price is subject to a working capital
adjustment to be performed during the first quarter of 2010, pursuant to which a
portion of the cash consideration paid at closing may be returned to the Company
to the extent that the actual working capital of AI delivered at closing,
determined in accordance with a formula set forth in the Purchase Agreement, is
less than $5.5 million.




The
Company incurred acquisition-related expenses of approximately $1,355,000, of
which $1,241,000 are included in selling, general and administrative expenses
and accrued expenses as of December 31, 2009.




The
acquisition has been accounted for using the acquisition method of accounting
and the purchase price will be assigned to the net assets acquired based on the
fair value of such assets and liabilities at the date of
acquisition.  The Company is in the process of finalizing the fair
value of the assets acquired and liabilities assumed thus the preliminary
allocation of the purchase may be subject change. The Company recorded
$1,200,000 of contingent consideration based on the estimated number of new
units of telematics equipment to be sold in 2010. The contingent consideration
was estimated using a probability weighted calculation of the number of new
units telematics equipment expected to be sold in 2010.  The
preliminary allocation of the AI purchase price consists of the
following:




Current
      assets
                  
                  $
                  4,809,000Inventory
                  
                  
                  7,030,000Other
      assets
                  
                  
                  916,000Current
      liabilities
                  
                  
                  (6,383,000
                  )Intangibles
                  
                  
                  3,200,000Goodwill
      and other intangibles
                  
                  
                  6,628,000Less:
      Contingent consideration
                  
                  
                  (1,200,000
                  )Fair
      value of assets acquired
                  
                  $
                  15,000,000





The fair
value of the assets acquired and liabilities assumed and the acquired goodwill
and intangible assets is provisional pending the completion of the valuation of
these assets.  The goodwill arising from the acquisition consists
largely of the synergies and cost reductions through economies of scale expected
from combining the operations of the Company and AI.  The goodwill is
expected to be fully deductible for tax purposes, except, contingent
consideration is deductible only when paid.




The fair
value of the current assets acquired includes trade accounts receivables with a
fair value of $4,809,000.  The gross amount due is $5,471,000 of which
$662,000 is expected to be uncollectible.




The
following table represents the combined pro-forma balance sheet as of December
31, 2009:




Pro
      FormaHistorical
                    
                    
                    CombinedCash
      and cash equivalents
                    
                    $
                    19,481,000
                    
                    
                    $
                    4,481,000Investments
      – short term
                    
                    
                    33,909,000
                    
                    
                    
                    33,909,000Accounts
      receivable - net
                    
                    
                    3,252,000
                    
                    
                    
                    8,061,000Inventory
      - net
                    
                    
                    4,487,000
                    
                    
                    
                    11,517,000Other
      current assets
                    
                    
                    783,000
                    
                    
                    
                    783,000Total
      current assets
                    
                    
                    61,912,000
                    
                    
                    
                    58,751,000Total
      other assets
                    
                    
                    8,663,000
                    
                    
                    
                    19,407,000Total
      Assets
                    
                    $
                    70,575,000
                    
                    
                    $
                    78,158,000Total
      current liabilities
                    
                    
                    14,233,000
                    
                    
                    $
                    21,816,000Total
      long term liabilities
                    
                    
                    461,000
                    
                    
                    
                    461,000Total
      liabilities
                    
                    
                    14,694,000
                    
                    
                    
                    22,277,000Total
      stockholders’ equity
                    
                    
                    55,881,000
                    
                    
                    
                    55,881,000Total
      liabilities and stockholders’ equity
                    
                    $
                    70,575,000
                    
                    
                    $
                    78,158,000




As of the
effective time of the acquisition contingencies are required to be measured at
fair value, if the acquisition-date fair value of the asset or liability arising
from a contingency can be determined. The asset or liability would be recognized
at the acquisition date if both of the following criteria were met: (i) it is
probable that an asset existed or that a liability had been incurred at the
acquisition date, and (ii) the amount of the asset or liability can be
reasonably estimated. These criteria are to be applied using the guidance in ASC
Topic 405, Contingencies. As of the date
of acquisition, GEAI was involved in various legal proceedings. However, I.D.
Systems is still reviewing information regarding the fair value of these
contingencies. A fair valuation effort requires review of legal matters and
associated defense strategies, which are in progress. As required, AI currently
accounts for these contingencies under ASC Topic 405. If fair value cannot be
determined for AI’s contingencies, the combined company would continue to
account for the AI contingencies using ASC Topic 405. For the purpose of these
pro forma combined financial statements, I.D. Systems has not adjusted the AI
book values for contingencies. This approach is preliminary and subject to
change after completion of the final review and assessment of the
contingencies.





The
following table represents the combined pro-forma revenue and earnings for the
year ended December 31, 2009:




Pro
      FormaHistorical
                  
                  
                  CombinedRevenue
                  
                  $
                  10,316,000
                  
                  
                  $
                  37,625,000Net
      loss
                  
                  
                  (13,192,000
                  )
                  
                  
                  (27,242,000
                  )Net
      loss per share – basic and diluted
                  
                  
                  (1.20
                  )
                  
                  
                  (2.48
                  )




The
combined pro-forma revenue and earnings were prepared as though the acquisition
had occurred as of January 1, 2009.  This summary is not necessarily
indicative of what the results of operations would have been had this business
acquisition occurred during such period, nor, does it purport to represent
results of operations for any future periods.


40


Operating
Activities





Net cash
used in operating activities was $6.9 million for the year ended December 31,
2009, compared to net cash used in operating activities of $4.9 million for the
year ended December 31, 2008. The net cash used in operating activities for the
year ended December 31, 2009 reflects a net loss of $13.2 million and includes
non-cash charges of $2.2 million for stock-based compensation, $0.6 million for
inventory reserves and $0.5 million for depreciation and amortization
expense.  Changes in working capital items included:





·
            a
      decrease in accounts receivable of $5.0 million resulting from the cash
      collections related to receivables outstanding at December 31, 2008 and
      the overall decrease in revenue;·
            a
      increase in inventory of $1.8 million; and·
            a
      decrease in accounts payable and accrued expenses of $3.7 million
      primarily due to the timing of the payments to our
  vendors.





Net cash
used in operating activities was $4.9 million for the year ended December 31,
2008 compared to net cash provided by operating activities of $604,000 for the
year ended December 31, 2007. The change was due primarily to an increase in
accounts receivable resulting from the increase in revenue, partially offset by
a decrease in net loss.





Investing
Activities





Net cash
provided by investing activities was $2.2 million for the year ended December
31, 2009, compared to net cash provided by investing activities of $15.4 million
for the year ended December 31, 2008. The change was due primarily to an
increase in the maturities of investments, which was partially offset by fewer
purchases of investments and the business acquisition of Didbox
Ltd.





Net cash
provided by investing activities was $15.4 million for the year ended December
31, 2008 compared to net cash provided by investing activities of $284,000 for
the year ended December 31, 2007. The increase was due to an increase in the
maturities of investments, which was partially offset by fewer purchases of
investments in 2008 and the business acquisition of PowerKey.





Financing
Activities





Net cash
provided by financing activities was $11.6 million for the year ended December
31, 2009, compared to net cash used in financing activities of $3.0 million for
the year ended December 31, 2008. The increase was due to the borrowing of $12.9
million from the UBS line of credit facility.





Net cash
used in financing activities was $3.0 million for the year ended December 31,
2008, compared to net cash used in financing activities of $5.4 million for the
year ended December 31, 2007. The decrease in cash used was due primarily to
less cash used to purchase shares of our issued and outstanding common stock
during 2008 pursuant to our share repurchase program authorized by our Board of
Directors in May 2007 and an increase in proceeds from the exercise of stock
options.





Capital
Requirements





We
believe that with the proceeds received from our public offering that was
completed by us in March 2006, the cash we have on hand and operating cash flows
we expect to generate, we will have sufficient funds available to cover our
capital requirements for at least the next 12 months.





Our
capital requirements depend on a variety of factors, including, but not limited
to, the length of the sales cycle, the rate of increase or decrease in our
existing business base, the success, timing, and amount of investment required
to bring new products to market, revenue growth or decline and potential
acquisitions. Failure to generate positive cash flow from operations will have a
material adverse effect on our business, financial condition and results of
operations. We may determine in the future that we require additional funds to
meet our long-term strategic objectives, including for the completion of
potential acquisitions. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve significant
restrictive covenants, and we cannot assure you that such financing will be
extended on terms acceptable to us or at all.


41


Term
Loan





In
January 2003, we closed on a five-year term loan for $1,000,000 with a financial
institution. Interest at the 30-day LIBOR plus 1.75% and principal are payable
monthly. To hedge the loan’s floating interest expense, we entered into an
interest rate swap contemporaneously with the closing of the loan and fixed the
rate of interest at 5.28% for the five-year term. At December 31, 2007, the
outstanding balance on the loan was $19,000. In February 2008, we paid off the
remaining principal balance on the loan which was $0 at December 31, 2008. The
term-loan expired in 2008.




Line
of Credit




In
October 2008, the Company received an offer (the “Offer”) from UBS for a put
right  (the “ARSR”) permitting the Company to sell to UBS at par
value all auction-rate securities (“ARS”) held by the Company, all of which
were purchased by the Company from UBS, at a future date (any time
during a two-year period beginning June 30, 2010).  Included as part
of the Offer, the Company received a commitment to obtain a loan for 75% of
the UBS-determined value of the ARS at any time until the put option is
exercised at a variable interest rate (1.24% at December 31, 2009) that will
equal the lesser of: (i) the applicable reference rate plus a spread set forth
in the applicable credit agreement and (ii) the then-applicable weighted average
interest or dividend rate paid to the Company by the issuer of the ARS that is
pledged to UBS as collateral. The Company accepted the Offer in November 2008.
In March 2009, the Company borrowed $12,900,000 (which amount was equal to 75%
of the UBS-determined value of the ARS) against this credit
facility. Principal payments reduced the Company’s obligation to
$11,638,000 at December 31, 2009. This line of credit facility is payable on
demand.




Contractual
Obligations and Commitments





The
following table summarizes our significant contractual obligations and
commitments as of December 31, 2009:





Payment due by PeriodTotal
                                                            
                                                            Less than
                                                              one year
                                                            
                                                            1 to 3 years
                                                            
                                                            3 to 5 years
                                                            
                                                            After 5
                                                              yearsLine
      of credit
                                                            $
                                                            11,638,000
                                                            
                                                            $
                                                            11,638,000Operating
      leases *
                                                            
                                                            607,000
                                                            
                                                            
                                                            403,000
                                                            
                                                            
                                                            204,000
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            —Total
      Contractual Cash Obligations
                                                            $
                                                            12,245,000
                                                            
                                                            $
                                                            12,041,000
                                                            
                                                            $
                                                            204,000
                                                            
                                                            $
                                                            —
                                                            
                                                            $
                                                            —





*Includes
contractual obligations from the Asset Intelligence acquisition on January
7,2010.





Purchase
orders or contracts for the purchase of raw materials and other goods and
services are not included in the table above. We are not able to determine the
aggregate amount of such purchase orders that represent contractual obligations,
as purchase orders may represent authorizations to purchase rather than binding
agreements. Although we have entered into contracts for services, the
obligations under these contracts were not significant and the contracts
generally contain clauses allowing for cancellation without significant
penalty.





The
expected timing or payment of obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be different
depending on changes to agreed upon amounts for some obligations.





Inflation





We
believe our operations have not been and, in the foreseeable future, will not be
materially and adversely affected by inflation or changing prices.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to
investors.


42


Recently
Issued Accounting Pronouncements





We
adopted Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and
Disclosures,” in two steps: effective January 1, 2008, we adopted it for
all financial instruments and non-financial instruments accounted for at fair
value on a recurring basis and effective January 1, 2009, for all non-financial
instruments accounted for at fair value on a non-recurring basis. This guidance
establishes a new framework for measuring fair value and expands related
disclosures.




In June
2009, the FASB issued SFAS No. 166 (“ASC 860”), “Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”).
ASC 860 improves the relevance, representational faithfulness, and comparability
of the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. ASC 860 is effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter. The
Company is evaluating the impact that the adoption of ASC 860 will have on its
consolidated financial statements and anticipates that it will not have an
impact on the Company’s consolidated financial position or results of
operations.




In June
2009, the FASB issued SFAS No. 167 (“ASC 810”), “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”). ASC 810 improves financial reporting by
enterprises involved with variable interest entities and addresses (1) the
effects on certain provisions of FASB Interpretation No. 46 (revised December
2003), “Consolidation of
Variable Interest Entities,” as a result of the elimination of the
qualifying special-purpose entity concept in SFAS 166, and (2) constituent
concerns about the application of certain key provisions of Interpretation
46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about an
enterprise’s involvement in a variable interest entity. ASC 810 is effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. In
February 2010, FASB deferred the effective date of the amendments to the
consolidation requirements n certain types of entities.  The Company
is evaluating the impact that the adoption of ASC 810 will have on its
consolidated financial statements and anticipates that it will not have an
impact on the Company’s consolidated financial position or results of
operations.





In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair
Value.” This ASU clarifies the application of certain valuation
techniques in circumstances in which a quoted price in an active market for the
identical liability is not available and clarifies that when estimating the fair
value of a liability, the fair value is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer. The guidance provided in
this ASU became effective on October 1, 2009. The adoption of this ASU did
not have a material impact on our consolidated financial
statements.


43


In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements.” This ASU establishes the accounting and reporting guidance
for arrangements including multiple revenue-generating activities. This ASU
provides amendments to the criteria for separating deliverables, measuring and
allocating arrangement consideration to one or more units of accounting. The
amendments in this ASU also establish a selling price hierarchy for determining
the selling price of a deliverable. Significantly enhanced disclosures are also
required to provide information about a vendor’s multiple-deliverable revenue
arrangements, including information about the nature and terms, significant
deliverables, and its performance within arrangements. The amendments also
require providing information about the significant judgments made and changes
to those judgments and about how the application of the relative selling-price
method affects the timing or amount of revenue recognition. The amendments in
this ASU are effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Early application is permitted. The Company is currently evaluating the impact
that the adoption of this ASU will have on its consolidated financial statements
but only if adopted in tandem with ASU 2009-14 (see below).




In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That
Include Software Elements.” This ASU changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality” and scopes these products out of
current software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered “essential to the
functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating the impact that
the adoption of this ASU will have on its consolidated financial
statements.





In
January 2010, the FASB issued additional guidance for improving disclosures
about fair value measurement. Under this guidance, two new disclosures are
required (i) transfers in and out of Level 1 and 2 measurements and the reasons
for the transfers and (ii) a gross presentation of activity within the Level 3
rollforward.  The guidance is effective for interim and annual
reporting periods beginning after December 15, 2009.  The Company does
not expect that the adoption of this guidance will have an impact on results of
operations or financial position.





In May
2009, and as amended in February 2010, new authoritative accounting literature
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. This accounting principle was effective
for us as of June 30, 2009, and did not have a material impact on our
consolidated financial statements.





In
December 2007, the FASB issued new accounting standards establishing principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, including goodwill, the liabilities
assumed and any noncontrolling interest in the acquiree. This accounting
standard also establishes disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This accounting standard was effective for business
combinations for which the acquisition date is on or after January 1, 2009.
Accordingly, all business combinations that we complete are accounted for under
this new accounting standard.


44


Item 7A. Quantitative and Qualitative
Disclosures About Market Risk





We are
subject to market risks in the form of changes in corporate income tax
rates, which risks are currently immaterial to us.





We also
are subject to market risk from changes in interest rates which could
affect our future results of operations and financial condition. We manage our
exposure to these risks through our regular operating and financing activities.
As of December 31, 2009, we had cash, cash equivalents and investments, which
includes auction-rate securities and an auction-rate securities right, of $60.1
million.





As of
December 31, 2009, the carrying value of our cash and cash equivalents
approximated fair value. In a declining interest rate environment, as short-term
investments mature, reinvestment occurs at less favorable market rates,
negatively impacting future investment income. We maintain our cash and cash
equivalents with major financial institutions; however, our cash and cash
equivalent balances with these institutions exceed the Federal Deposit Insurance
Corporation (“FDIC”) insurance limits. While we monitor on a systematic basis
the cash and cash equivalent balances in the operating accounts and adjust the
balances as appropriate, these balances could be impacted if one or more of the
financial institutions with which we deposit our cash and cash equivalents fails
or is subject to other adverse conditions in the financial or credit markets. To
date, we have experienced no loss of principal or lack of access to our invested
cash or cash equivalents; however, we can provide no assurance that access to
our invested cash and cash equivalents will not be affected if the financial
institutions in which we hold our cash and cash equivalents fail or the
financial and credit markets continue to worsen.





At
December 31, 2008 and 2009, we held approximately $20.1 million and $19.4
million fair value, respectively, in investments in ARS and ARSR.  The
Company purchased all the ARS it holds from UBS.  These ARS represent
interests in collateralized pools of student loan receivables issued by agencies
established by counties, cities, states and other municipal entities within the
United States.  Liquidity for these ARS is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals. In February 2008 and continuing into 2009, these securities failed to
sell at auction.  Holders of the securities continue to receive
interest on the investments, and the securities continue to be auctioned at the
pre-determined intervals (typically every 28 days) until the auction succeeds,
the issuer calls the securities, or they mature. These failed auctions represent
liquidity risk exposure and are not defaults or credit events. A decline in the
value of these securities that is not temporary could materially adversely
affect our liquidity and income.




In
October 2008, we received a non-transferable offer (the “Offer”) from UBS for a
put right permitting us to sell to UBS at par value all ARS previously purchased
from UBS at a future date (any time during a two-year period beginning June 30,
2010). The Offer also included a commitment to loan us 75% of the UBS-determined
value of the ARS at any time until the put is exercised at a variable interest
rate that will equal the lesser of: (i) the applicable reference rate plus a
spread set forth in the applicable credit agreement and (ii) the then-applicable
weighted average interest or dividend rate paid to the Company by the issuer of
the ARS that is pledged to UBS as collateral. In November 2008, the Company
accepted the Offer. In exchange for the Offer, we provided UBS with
a general release of claims (other than certain consequential damages
claims) concerning our ARS and granted UBS the right to purchase our ARS at any
time for full par value. Our right under the Offer is in substance a put right
(with the strike price equal to the par value of the ARS) which we recorded as
an asset, measured at its fair value with the resultant gain recognized in
earnings. We initially recorded the put right at a fair value of $2.0 million
and recognized the gain and a $2.3 million loss in the fair value of the ARS in
operations. As we have classified the ARS as trading securities, the change in
fair value of the ARS is charged to operations. The unrealized (loss) gain
charged to operations in 2008 and 2009 was $(338,000) and $338,000,
respectively, which is included in other expense. The fair value of the put
right was based on an approach in which the present value of all expected future
cash flows were subtracted from the current fair market value of the security
and the resultant value was calculated as a future value at an interest rate
reflective of counterparty risk.





Given the
substantial dislocation in the financial markets and among financial services
companies, we cannot assure you that UBS ultimately will have the ability to
repurchase our auction rate securities at par, or at any other price, as these
rights will be an unsecured contractual obligation of UBS or that if UBS
determines to purchase our ARS at any time, we will be able to reinvest the cash
proceeds of any such sale at the same interest rate or dividend yield currently
being paid to us. Also, as a condition of accepting the auction-rate securities
rights, we were required to sign a release of claims against UBS, which will
prevent us from making claims against UBS related to our investment in ARS,
other than claims for consequential damages.


45


Item 8. Financial Statements and
Supplementary Data





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
                        
                        
                        47Consolidated
      Balance Sheets at December 31, 2008 and 2009
                        
                        
                        48Consolidated
      Statements of Operations for the YearsEnded
      December 31, 2007, 2008 and 2009
                        
                        
                        49Consolidated
      Statements of Changes in Stockholders' Equity for the
YearsEnded
      December 31, 2007, 2008 and 2009
                        
                        
                        50Consolidated
      Statements of Cash Flows for the YearsEnded
      December 31, 2007, 2008 and 2009
                        
                        
                        51Notes
      to the Consolidated Financial Statements
                        
                        
                        52


46


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders of




I.D.
Systems, Inc.




We have
audited the accompanying consolidated balance sheets of I.D. Systems, Inc. and
subsidiaries as of December 31, 2008 and 2009, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for
each of the years in the three-year period ended December 31, 2009. Our audits
also include the consolidated financial statement schedule II – Valuation and
Qualifying Accounts for each of the years in the three-year period ended
December 31, 2009 listed in Item 15.(a)(2) in the accompanying index. These
consolidated financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.




We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged for 2009 to
perform an audit of the Company’s internal control over financial reporting. Our
audit of the 2009 financial statements includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of I.D. Systems, Inc. and
subsidiaries as of December 31, 2008 and 2009, and the results of their
consolidated operations and their consolidated cash flows for each of the years
in the three-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
consolidated financial statement schedule referred to above, when considered in
relation to the basic consolidated financial statements, taken as a whole,
presents fairly, in all material respects, the information stated
therein.




As
described in Note B to the consolidated financial statements, the Company
elected to measure certain financial assets at fair value effective January 1,
2008.




/s/
Eisner LLP




New York,
New York




March 30,
2010


47


I.D.
SYSTEMS, INC. AND SUBSIDIARIES


Consolidated
Balance Sheets





As of December 31,2008
                                        
                                        
                                        2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        12,558,000
                                        
                                        
                                        $
                                        19,481,000Restricted
      cash
                                        
                                        
                                        230,000
                                        
                                        
                                        
                                        —Investments –
      short term
                                        
                                        
                                        8,550,000
                                        
                                        
                                        
                                        33,909,000Accounts
      receivable, net of allowance for doubtful accounts of
      $239,000  and  $106,000 in 2008 and 2009,
      respectively
                                        
                                        
                                        8,245,000
                                        
                                        
                                        
                                        3,252,000Unbilled
      receivables
                                        
                                        
                                        168,000
                                        
                                        
                                        
                                        —Inventory,
      net
                                        
                                        
                                        3,273,000
                                        
                                        
                                        
                                        4,487,000Interest
      receivable
                                        
                                        
                                        217,000
                                        
                                        
                                        
                                        97,000Prepaid
      expenses and other current assets
                                        
                                        
                                        261,000
                                        
                                        
                                        
                                        686,000Total
      current assets
                                        
                                        
                                        33,502,000
                                        
                                        
                                        
                                        61,912,000Investments –long
      term
                                        
                                        
                                        34,911,000
                                        
                                        
                                        
                                        6,752,000Fixed
      assets, net
                                        
                                        
                                        1,050,000
                                        
                                        
                                        
                                        917,000Goodwill
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        619,000Intangible
      assets, net
                                        
                                        
                                        178,000
                                        
                                        
                                        
                                        375,000Other
      assets
                                        
                                        
                                        107,000
                                        
                                        
                                        
                                        —$
                                        69,948,000
                                        
                                        
                                        $
                                        70,575,000LIABILITIESCurrent
      liabilities:Accounts
      payable and accrued expenses
                                        
                                        $
                                        2,175,000
                                        
                                        
                                        $
                                        2,094,000Line
      of credit
                                        
                                        
                                        —
                                        
                                        
                                        
                                        11,638,000Deferred
      revenue
                                        
                                        
                                        424,000
                                        
                                        
                                        
                                        501,000Total
      current liabilities
                                        
                                        
                                        2,599,000
                                        
                                        
                                        
                                        14,233,000Deferred
      rent
                                        
                                        
                                        33,000
                                        
                                        
                                        
                                        —Deferred
      revenue
                                        
                                        
                                        231,000
                                        
                                        
                                        
                                        461,0002,863,000
                                        
                                        
                                        
                                        14,694,000Commitments
      and Contingencies (Note P)STOCKHOLDERS'
      EQUITYPreferred
      stock; authorized 5,000,000 shares, $0.01 par value; none
      issued
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Common
      stock; authorized 50,000,000 shares, $0.01 par value; 12,082,000 and
      12,284,000 shares issued at December 31, 2008 and 2009, respectively;
      shares outstanding, 10,893,000 and 11,075,000 at December 31, 2008 and
      2009, respectively
                                        
                                        
                                        120,000
                                        
                                        
                                        
                                        120,000Additional
      paid-in capital
                                        
                                        
                                        101,437,000
                                        
                                        
                                        
                                        103,596,000Accumulated
      deficit
                                        
                                        
                                        (23,667,000
                                        )
                                        
                                        
                                        (36,859,000
                                        )Accumulated
      other comprehensive income
                                        
                                        
                                        46,000
                                        
                                        
                                        
                                        (60,000
                                        )77,936,000
                                        
                                        
                                        
                                        66,797,000Treasury
      stock; 1,189,000 shares and 1,209,000 shares at cost at December 31, 2008
      and 2009, respectively
                                        
                                        
                                        (10,851,000
                                        )
                                        
                                        
                                        (10,916,000
                                        )Total
      stockholders’ equity
                                        
                                        
                                        67,085,000
                                        
                                        
                                        
                                        55,881,000Total
      liabilities and stockholders’ equity
                                        
                                        $
                                        69,948,000
                                        
                                        
                                        $
                                        70,575,000





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


48


I.D.
SYSTEMS, INC. AND SUBSIDIARIES


Consolidated
Statements of Operations





Year Ended December 31,2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009Revenues:Products
                                    
                                    $
                                    11,037,000
                                    
                                    
                                    $
                                    20,072,000
                                    
                                    
                                    $
                                    6,470,000Services
                                    
                                    
                                    6,046,000
                                    
                                    
                                    
                                    6,974,000
                                    
                                    
                                    
                                    3,846,00017,083,000
                                    
                                    
                                    
                                    27,046,000
                                    
                                    
                                    
                                    10,316,000Cost
      of Revenues:Cost
      of products
                                    
                                    
                                    5,859,000
                                    
                                    
                                    
                                    9,996,000
                                    
                                    
                                    
                                    3,882,000Cost
      of services
                                    
                                    
                                    3,070,000
                                    
                                    
                                    
                                    3,470,000
                                    
                                    
                                    
                                    1,672,0008,929,000
                                    
                                    
                                    
                                    13,466,000
                                    
                                    
                                    
                                    5,554,000Gross
      Profit
                                    
                                    
                                    8,154,000
                                    
                                    
                                    
                                    13,580,000
                                    
                                    
                                    
                                    4,762,000Operating
      expenses:Selling,
      general and administrative expenses
                                    
                                    
                                    15,963,000
                                    
                                    
                                    
                                    16,760,000
                                    
                                    
                                    
                                    16,543,000Research
      and development expenses
                                    
                                    
                                    2,849,000
                                    
                                    
                                    
                                    2,883,000
                                    
                                    
                                    
                                    2,604,00018,812,000
                                    
                                    
                                    
                                    19,643,000
                                    
                                    
                                    
                                    19,147,000Loss
      from operations
                                    
                                    
                                    (10,658,000
                                    )
                                    
                                    
                                    (6,063,000
                                    )
                                    
                                    
                                    (14,385,000
                                    )Interest
      income
                                    
                                    
                                    3,238,000
                                    
                                    
                                    
                                    2,226,000
                                    
                                    
                                    
                                    933,000Interest
      expense
                                    
                                    
                                    (10,000
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (130,000
                                    )Other
      income (loss)
                                    
                                    
                                    89,000
                                    
                                    
                                    
                                    (338,000
                                    )
                                    
                                    
                                    390,000Net
      loss
                                    
                                    $
                                    (7,341,000
                                    )
                                    
                                    $
                                    (4,175,000
                                    )
                                    
                                    $
                                    (13,192,000
                                    )Net
      loss per share – basic and diluted
                                    
                                    $
                                    (0.66
                                    )
                                    
                                    $
                                    (0.38
                                    )
                                    
                                    $
                                    (1.20
                                    )Weighted
      average common shares outstanding – basic and diluted
                                    
                                    
                                    11,205,000
                                    
                                    
                                    
                                    10,887,000
                                    
                                    
                                    
                                    10,991,000





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


49


I.D.
SYSTEMS, INC.


Consolidated
Statements of Changes in Stockholders' Equity





AccumulatedCommon Stock
                                              
                                              
                                              Additional
                                              
                                              
                                              
                                              
                                              
                                              OtherNumber of
                                              
                                              
                                              
                                              
                                              
                                              Paid-in
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Comprehensive
                                              
                                              
                                              Treasury
                                              
                                              
                                              Stockholders'Shares
                                              
                                              
                                              Amount
                                              
                                              
                                              Capital
                                              
                                              
                                              Deficit
                                              
                                              
                                              Income
                                              
                                              
                                              Stock
                                              
                                              
                                              EquityBalance
      at January 1, 2007
                                              
                                              
                                              11,337,000
                                              
                                              
                                              $
                                              113,000
                                              
                                              
                                              $
                                              93,423,000
                                              
                                              
                                              $
                                              (12,151,000
                                              )
                                              
                                              
                                              12,000
                                              
                                              
                                              $
                                              (113,000
                                              )
                                              
                                              $
                                              81,284,000Net
      loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (7,341,000
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (7,341,000
                                              )Comprehensive
      loss - unrealized loss on investments
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (1,000
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (1,000
                                              )Total
      comprehensive loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (7,342000
                                              )Shares
      issued pursuant to exercise of stock options
                                              
                                              
                                              205,000
                                              
                                              
                                              
                                              2,000
                                              
                                              
                                              
                                              365,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              367,000Shares
      repurchased
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (5,583,000
                                              )
                                              
                                              
                                              (5,583,000
                                              )Shares
      withheld pursuant to stock issuance
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (344,000
                                              )
                                              
                                              
                                              (344,000
                                              )Issuance
      of restricted stock
                                              
                                              
                                              19,000Stock
      based compensation – restricted stock
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              941,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              941,000Stock
      based compensation - options
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,347,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,347,000Balance
      at December 31, 2007
                                              
                                              
                                              11,561,000
                                              
                                              
                                              $
                                              115,000
                                              
                                              
                                              $
                                              97,076,000
                                              
                                              
                                              $
                                              (19,492,000
                                              )
                                              
                                              $
                                              11,000
                                              
                                              
                                              $
                                              (6,040,000
                                              )
                                              
                                              $
                                              71,670,000Net
      loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (4,175,000
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (4,175,000
                                              )Comprehensive
      income- unrealized gain on investments
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              35,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              35,000Total
      comprehensive loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (4,140,000
                                              )Shares
      issued pursuant to exercise of stock options
                                              
                                              
                                              505,000
                                              
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              1,372,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,377,000Shares
      repurchased
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (4,387,000
                                              )
                                              
                                              
                                              (4,387,000
                                              )Shares
      withheld pursuant to stock issuances
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (424,000
                                              )
                                              
                                              
                                              (424,000
                                              )Issuance
      of restricted stock
                                              
                                              
                                              16,000Stock
      based compensation – restricted stock
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              513,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              513,000Stock
      based compensation performance shares
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              292,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              292,000Stock
      based compensation - options
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,184,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,184,000Balance
      at December 31, 2008
                                              
                                              
                                              12,082,000
                                              
                                              
                                              $
                                              120,000
                                              
                                              
                                              $
                                              101,437,000
                                              
                                              
                                              $
                                              (23,667,000
                                              )
                                              
                                              $
                                              46,000
                                              
                                              
                                              $
                                              (10,851,000
                                              )
                                              
                                              $
                                              67,085,000Net
      loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (13,192,000
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (13,192,000
                                              )Foreign
      currency translation adjustment
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,000Comprehensive
      loss – unrealized loss on investments
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (107,000
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (107,000
                                              )Total
      comprehensive loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (13,298,000
                                              )Shares
      issued pursuant to exercise of stock options
                                              
                                              
                                              1,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,000Shares
      withheld pursuant to issuances of restricted and performance
      stock
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (65,000
                                              )
                                              
                                              
                                              (65,000
                                              )Issuance
      of restricted and performance stock
                                              
                                              
                                              201,000Stock
      based compensation – restricted stock
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              205,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              205,000Stock
      based compensation – performance shares
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              15,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              15,000Stock
      based compensation - options
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,937,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,937,000Balance
      at December 31, 2009
                                              
                                              
                                              12,284,000
                                              
                                              
                                              $
                                              120,000
                                              
                                              
                                              $
                                              103,596,000
                                              
                                              
                                              $
                                              (36,859,000
                                              )
                                              
                                              $
                                              (60,000
                                              )
                                              
                                              $
                                              (10,916,000
                                              )
                                              
                                              $
                                              55,881,000





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


50


I.D.
SYSTEMS, INC.


Consolidated
Statements of Cash Flows





Year Ended December 31,2007
                                                
                                                
                                                2008
                                                
                                                
                                                2009Cash
      flows from operating activities:Net
      loss
                                                
                                                $
                                                (7,341,000
                                                )
                                                
                                                $
                                                (4,175,000
                                                )
                                                
                                                $
                                                (13,192,000
                                                )Adjustments
      to reconcile net loss to cash provided by (used in) operating
      activities:Inventory
      reserve
                                                
                                                
                                                517,000
                                                
                                                
                                                
                                                126,000
                                                
                                                
                                                
                                                621,000Accrued
      interest income
                                                
                                                
                                                20,000
                                                
                                                
                                                
                                                (75,000
                                                )
                                                
                                                
                                                120,000Stock
      based compensation
                                                
                                                
                                                3,288,000
                                                
                                                
                                                
                                                2,989,000
                                                
                                                
                                                
                                                2,157,000Depreciation
      and amortization
                                                
                                                
                                                544,000
                                                
                                                
                                                
                                                540,000
                                                
                                                
                                                
                                                533,000Deferred
      rent expense
                                                
                                                
                                                (22,000
                                                )
                                                
                                                
                                                (22,000
                                                )
                                                
                                                
                                                (22,000
                                                )Deferred
      revenue
                                                
                                                
                                                104,000
                                                
                                                
                                                
                                                197,000
                                                
                                                
                                                
                                                307,000Change
      in fair value of investments
                                                
                                                
                                                
                                                
                                                338,000
                                                
                                                
                                                
                                                (338,000
                                                )Deferred
      contract costs
                                                
                                                
                                                33,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Changes
      in:Restricted
      cash
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (230,000
                                                )
                                                
                                                
                                                230,000Accounts
      receivable
                                                
                                                
                                                2,226,000
                                                
                                                
                                                
                                                (5,370,000
                                                )
                                                
                                                
                                                5,049,000Unbilled
      receivables
                                                
                                                
                                                462,000
                                                
                                                
                                                
                                                412,000
                                                
                                                
                                                
                                                168,000Inventory
                                                
                                                
                                                1,493,000
                                                
                                                
                                                
                                                1,212,000
                                                
                                                
                                                
                                                (1,815,000
                                                )Prepaid
      expenses and other assets
                                                
                                                
                                                (20,000
                                                )
                                                
                                                
                                                10,000
                                                )
                                                
                                                
                                                (320,000
                                                )Accounts
      payable and accrued expenses
                                                
                                                
                                                (700,000
                                                )
                                                
                                                
                                                (843,000
                                                )
                                                
                                                
                                                (369,000
                                                )Net
      cash provided by (used in) operating activities
                                                
                                                
                                                604,000
                                                
                                                
                                                
                                                (4,891,000
                                                )
                                                
                                                
                                                (6,871,000
                                                )Cash
      flows from investing activities:Purchase
      of fixed assets
                                                
                                                
                                                (548,000
                                                )
                                                
                                                
                                                (188,000
                                                )
                                                
                                                
                                                (358,000
                                                )Business
      acquisition
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (573,000
                                                )
                                                
                                                
                                                (518,000
                                                )Purchase
      of investments
                                                
                                                
                                                (15,691,000
                                                )
                                                
                                                
                                                (28,513,000
                                                )
                                                
                                                
                                                (59,408,000
                                                )Maturities
      of investments
                                                
                                                
                                                16,523,000
                                                
                                                
                                                
                                                44,649,000
                                                
                                                
                                                
                                                62,439,000Net
      cash provided by investing activities
                                                
                                                
                                                284,000
                                                
                                                
                                                
                                                15,375,000
                                                
                                                
                                                
                                                2,155,000Cash
      flows from financing activities:Repayment
      of term loan
                                                
                                                
                                                (221,000
                                                )
                                                
                                                
                                                (19,000
                                                )
                                                
                                                
                                                —Proceeds
      from exercise of stock options
                                                
                                                
                                                367,000
                                                
                                                
                                                
                                                1,377,000
                                                
                                                
                                                
                                                2,000Collection
      of officer loan
                                                
                                                
                                                8,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Borrowings
      on line of credit
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                12,900,000Principal
      payments on line of credit
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,262,000
                                                )Purchase
      of treasury shares
                                                
                                                
                                                (5,583,000
                                                )
                                                
                                                
                                                (4,387,000
                                                )Net
      cash (used in) provided by financing activities
                                                
                                                
                                                (5,429,000
                                                )
                                                
                                                
                                                (3,029,000
                                                )
                                                
                                                
                                                11,640,000Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,000
                                                )Net
      (decrease) increase in cash and cash equivalents
                                                
                                                
                                                (4,541,000
                                                )
                                                
                                                
                                                7,455,000
                                                
                                                
                                                
                                                6,923,000Cash
      and cash equivalents - beginning of period
                                                
                                                
                                                9,644,000
                                                
                                                
                                                
                                                5,103,000
                                                
                                                
                                                
                                                12,558,000Cash and cash
      equivalents  -   end of
      period
                                                
                                                $
                                                5,103,000
                                                
                                                
                                                $
                                                12,558,000
                                                
                                                
                                                $
                                                19,481,000Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
                                                
                                                $
                                                10,000
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                130,000Non-cash
      investing and financing activities include:Shares
      withheld pursuant to stock issuance
                                                
                                                $
                                                344,000
                                                
                                                
                                                $
                                                424,000
                                                
                                                
                                                $
                                                65,000Unrealized
      loss on investments
                                                
                                                
                                                (1,000
                                                )
                                                
                                                
                                                (35,000
                                                )
                                                
                                                
                                                (107,000
                                                )Accrual
      of contingent consideration and accrued expenses
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                110,000Acquisition:Fair
      value of assets acquired
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                748,000Liabilities
      assumed
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (104,000
                                                )Less:
      contingent consideration potentially due in 2010
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (110,000
                                                )Less:
      cash acquired
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (16,000
                                                )Net
      cash paid in 2009
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                518,000





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


51




I.D.
SYSTEMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2009




NOTE
A - THE COMPANY




I.D.
Systems, Inc. (the “Company”) develops, markets and sells wireless solutions for
managing and securing high-value enterprise assets. These assets include
industrial vehicles, such as forklifts and airport ground support equipment, and
rental vehicles. The Company’s patented wireless asset management system
addresses the needs of organizations to control, track, monitor and analyze
their assets. The Company’s solutions enable customers to achieve tangible
economic benefits by making timely, informed decisions that increase the
security, productivity and efficiency of their operations. The Company
outsources its hardware manufacturing operations to contract manufacturers. The
Company was incorporated in Delaware in 1993 and commenced operations in January
1994.




NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




[1]
            Principles
      of consolidation:





The
consolidated financial statements include the accounts of I.D. Systems, Inc.
(the “Company”) and its wholly owned foreign subsidiaries I.D. Systems, GmbH
(“GmbH”) and Didbox, Ltd. (“Didbox”).  All material intercompany
balances and transactions have been eliminated in consolidation.





[2]
            Use
      of estimates:




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company continually evaluates estimates used in the preparation
of the financial statements for reasonableness. The most significant estimates
relate to stock-based compensation arrangements, the fair value of auction
rate securities and the auction rate securities rights, realization of deferred
tax assets, and the impairment of tangible and intangible assets.




[3]
            Cash
      and cash equivalents:




The
Company considers all highly liquid debt instruments with an original maturity
of three months or less when purchased to be cash equivalents unless they are
legally or contractually restricted.  The Company’s cash and cash
equivalent balances exceeded FDIC limits.





[4]
            Restricted
      cash:





Restricted
cash at December 31, 2008 consisted of cash held in escrow for inventory
purchases from a vendor.


52


[5]
            Investments:




The
Company’s investments include debt securities, government and state agency
bonds, corporate bonds and auction rate securities, which are classified as
either available for sale, held to maturity or trading, depending on
management’s investment intentions relating to these securities. Available for
sale securities are marked to market based on quoted market values of the
securities, with the unrealized gain and (losses), reported as comprehensive
income or (loss). Investments categorized as held to maturity are carried at
amortized cost because the Company has both the intent and the ability to hold
these investments until they mature. The Company has classified as short-term
those securities that mature within one year, and all other securities are
classified as long-term.




The
Company’s investments include auction rate securities (“ARS”) and an auction
rate securities right (“ARSR”).  The Company has classified its ARS
and ARSR investments as trading securities as set forth in the accounting
guidance.  Trading securities are carried at fair value, with
unrealized holding gains and losses included in other income (expense) on the
Company’s consolidated statements of operations.




[6]
            Accounts
      Receivable:





The
Company maintains reserves against its accounts receivable for potential losses.
Allowances for uncollectible accounts are estimated based on the Company’s
periodic review of accounts receivable balances and historical reference.
Accounts receivable are net of an allowance for doubtful accounts in the amount
of $239,000 and $106,000 in 2008 and 2009, respectively.





[7]
            Revenue
      recognition:




The
Company’s product revenue is derived from: (i) sales of our wireless asset
management system, which includes training and technical support; (ii)
post-contract maintenance and support agreements; and (iii) periodically, from
leasing arrangements. Our system consists of on-asset hardware, communication
infrastructure and software. Revenue is allocated to each element based upon
vendor specific objective evidence (VSOE) of the fair value of the element. VSOE
of the fair value is based upon the price charged when the element is sold
separately. Revenue is recognized as each element is earned based on the selling
price of each element and when there are no undelivered elements that are
essential to the functionality of the delivered elements. The Company’s system
is typically implemented by the customer or a third party and, as a result,
revenue is recognized when title and risk of loss passes to the customer, which
usually is upon delivery of the system, persuasive evidence of an arrangement
exists, sales price is fixed and determinable, collectability is reasonably
assured and contractual obligations have been satisfied. In some instances, we
are also responsible for providing installation services. The additional
installation services, which could be performed by third parties, are considered
another element in a multi-element deliverable and revenue for installation
services is recognized at the time the installation is
provided.  Training and technical support revenue are recognized at
time of performance.




The
Company also enters into post-contract maintenance and support agreements.
Revenue is recognized over the service period and the cost of providing these
services is expensed as incurred.




[8]
            Unbilled
      receivables and deferred revenue:





Under
certain customer contracts, the Company invoices progress billings once certain
milestones are met. The milestone terms vary by customer and can include upon
receipt of the customer purchase order, delivery, installation and launch. As
the systems are delivered, and services are performed, and all of the criteria
for revenue recognition are satisfied, the Company recognizes revenue. If the
amount of revenue recognized for financial reporting purposes is greater than
the amount invoiced, an unbilled receivable is recorded. If the amount invoiced
is greater than the amount of revenue recognized for financial reporting
purposes, deferred revenue is recorded. As of December 31, 2008 and 2009,
unbilled receivables were $168,000 and $0, respectively, and deferred revenue
was $655,000 and $962,000, respectively.  Deferred revenue also
includes prepayment of extended maintenance and supports
contracts.


53


[9]
            Inventory:




Inventory,
which primarily consists of finished goods and components used in the Company’s
products, is stated at the lower of cost or market using the first-in first-out
(FIFO) method.




Inventory
valuation reserves are established in order to report inventories at the lower
of cost or market value in the consolidated balance sheet.  The
determination of inventory valuation reserves requires management to make
estimates and judgments on the future salability of
inventories.  Valuation reserves for obsolete, and slow-moving
inventory are estimated by comparing the inventory levels to historical usage
rates and both future sales forecasts and production requirements. Other factors
that management considers in determining these reserves include whether
inventory parts meet current specifications or used a service part.





[10]
            Fixed
      assets and depreciation:




Fixed
assets are recorded at cost and depreciated using the straight-line method over
the estimated useful lives of the assets, which range from three to ten years.
Leasehold improvements are amortized using the straight-line method over the
terms of the respective leases, or their estimated useful lives, whichever is
shorter.




[11]
            Long-lived
      assets:




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to the future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets and would be charged
to earnings. For the years ended December 31, 2007, 2008 and 2009, the Company
has not incurred an impairment charge.





[12]
            Goodwill
      and Other Intangible Assets:





Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses.  Goodwill and intangible assets deemed to have
indefinite lives are not amortized.  Intangible assets other than
goodwill are amortized over their useful lives unless the lives are determined
to be indefinite.  Intangible assets are  carried at cost,
less accumulated amortization. Intangible assets consist of trademarks, customer
relationships and other intangible assets.  The Company tests goodwill
and other intangible assets to determine if impairment exists and if the use of
indefinite lives is currently applicable.  At December 31, 2009, the
Company determined that no impairment existed to the goodwill, customer list and
trademark and trade name, its acquired intangible assets. The Company also
determined that the use of indefinite lives for the customer list and trademark
and trade name remains applicable at December 31, 2009 and the Company expects
to derive future benefits from these intangible assets.





[13]
            Research
      and development:




Research
and development costs are charged to expense as incurred.




[14]
            Patent
      costs:




Costs
incurred in connection with acquiring patent rights are charged to expense as
incurred.





[15]
            Benefit
      plan:




The
Company maintains a retirement plan under Section 401(k) of the Internal Revenue
Code, which covers all eligible employees. All employees with U.S. source income
are eligible to participate in the plan immediately upon
employment.  The Company did not make any contributions to the plan
during the years ended December 31, 2007, 2008 and 2009.


54


[16]
            Rent
      expense:




Expense
related to the Company’s facility lease is recorded on a straight-line basis
over the lease term. The difference between rent expense incurred and the
amounts required to be paid in accordance with the lease term is recorded as
deferred rent and is amortized over the lease term.




[17]
            Stock-Based
      Compensation:




The
Company accounts for stock-based employee compensation for all share-based
payments, including grants of stock options as an operating expense, based on
their fair values on grant date.  The Company recorded stock-based
compensation expense of $3,288,000, $2,989,000 and $2,157,000 for the years
ended December 31, 2007, 2008 and 2009, respectively.




The
Company estimates the fair value of share-based payment awards on the grant date
using an option pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service
period in the Company’s consolidated statement of operations.  The
Company estimates forfeitures at the time of grant in order to estimate the
amount of share- based awards that will ultimately vest. The estimate is based
on the Company’s historical rates of forfeitures. Estimated forfeitures are
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates.





The fair
value of each option grant on the date of grant is estimated using the
Black-Scholes option-pricing model reflecting the following weighted-average
assumptions:





December 31,2007
                              
                              
                              2008
                              
                              
                              2009Expected
      volatility
                              
                              
                              48.3%
      - 77.8
                              %
                              
                              
                              58.4%
      - 75.8
                              %
                              
                              
                              54.1%
      - 75.6
                              %Expected
      life of options
                              
                              
                              5
      years
                              
                              
                              5
      years
                              
                              
                              
                              5
      yearsRisk
      free interest rate
                              
                              
                              5
                              %
                              
                              
                              3
                              %
                              
                              
                              2
                              %Dividend
      yield
                              
                              
                              0
                              %
                              
                              
                              0
                              %
                              
                              
                              0
                              %Weighted
      average fair value of options granted during the year
                              
                              $
                              7.05
                              
                              
                              $
                              3.87
                              
                              
                              $
                              1.85





Expected
volatility is based on historical volatility of the Company’s stock and the
expected life of options is based on historical data with respect to employee
exercise periods.





[18]
            Income
      taxes:




The
Company uses the asset and liability method of accounting for deferred income
taxes. Deferred income taxes are measured by applying enacted statutory rates to
net operating loss carryforwards and to the differences between the financial
reporting and tax bases of assets and liabilities. Deferred tax assets are
reduced, if necessary, by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be
realized.





Effective
January 1, 2007, the Company adopted the provision of the Income Taxes Topic of
the FASB ASC as it relates to the accounting for uncertainty in income
taxes.  The provision prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of an income
tax position taken or expected to be taken in a tax return. It also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. As of December 31, 2009, the
Company did not have any unrecognized tax benefits. The Company recognizes any
interest accrued related to unrecognized tax benefits in interest expense and
penalties in operating expenses. For the year ended December 31, 2008 and 2009,
there was no such interest or penalty. Income tax returns for the years 2006 and
subsequent are open for examination.


55


[19]
            Net
      loss per share:




December 31,Basic and diluted loss per
      share
                
                2007
                
                
                2008
                
                
                2009Net
      loss
                
                $
                (7,341,000
                )
                
                $
                (4,175,000
                )
                
                $
                (13,192,000
                )Weighted
      average common shares outstanding – basic and diluted
                
                
                11,205,000
                
                
                
                10,887,000
                
                
                
                10,991,000Net
      loss per share – basic and diluted
                
                $
                (0.66
                )
                
                $
                (0.38
                )
                
                $
                (1.20
                )




Basic
loss per share is calculated by dividing net loss by the weighted-average number
of common shares outstanding during the period. Diluted loss per share reflects
the potential dilution assuming common shares were issued upon the exercise of
outstanding options and the proceeds thereof were used to purchase outstanding
common shares. For the years ended December 31, 2007, 2008 and 2009, the basic
and diluted weighted-average shares outstanding are the same, since the effect
from the potential exercise of outstanding stock options of 2,761,000,
2,601,000, and 2,659,000, respectively, would have been
anti-dilutive.





[20]
            Fair
      Value of Financial Instruments:




The
carrying amounts of cash equivalents, accounts receivable, and investments in
securities, including ARS and the ARSR, are carried at fair value and accounts
payable, line of credit, and other liabilities approximate their fair values due
to the short period to maturity of these instruments.  The fair value of
the ARS was determined utilizing discounted cash flow approach and market
evidence with respect to the ARS’ collateral, ratings and insurance to assess
default risk, credit spread risk and downgrade risk.




[21]
            Customer
      Concentration:





Three
customers accounted for 37%, 32% and 10%, respectively, of the Company’s revenue
during the year ended December 31, 2007. Two of these customers accounted for
50% and 10%, respectively, of the Company’s accounts receivables and unbilled
receivables at December 31, 2007.





Two
customers accounted for 42% and 41%, respectively, of the Company’s revenue
during the year ended December 31, 2008. These two customers accounted for 28%
and 48%, respectively, of the Company’s accounts receivables and unbilled
receivables at December 31, 2008.




Four
customers accounted for 20%, 15%, 15% and 14%, respectively, of the Company’s
revenue during the year ended December 31, 2009. Two of these customers
accounted for 40% and 13% of the Company’s accounts receivable and unbilled
receivables at December 31, 2009.





[22]
            Advertising
      and Marketing Expense:




Advertising
and marketing costs are expensed as incurred. Advertising and marketing expense
for the years ended December 31, 2007, 2008 and 2009 amounted to $314,000,
$379,000 and $271,000, respectively.





[23]
            Recently
      Issued Accounting Pronouncements:





We
adopted Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and
Disclosures,” in two steps: effective January 1, 2008, we adopted it for
all financial instruments and non-financial instruments accounted for at fair
value on a recurring basis and effective January 1, 2009, for all non-financial
instruments accounted for at fair value on a non-recurring basis. This guidance
establishes a new framework for measuring fair value and expands related
disclosures.


56


In June
2009, the FASB issued SFAS No. 166 (“ASC 860”), “Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”).
ASC 860 improves the relevance, representational faithfulness, and comparability
of the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. ASC 860 is effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter. The
Company is evaluating the impact that the adoption of ASC 860 will have on its
consolidated financial statements  and anticipates that it will not
have an impact on the Company’s consolidated financial position or results of
operations.





In June
2009, the FASB issued SFAS No. 167 (“ASC 810”), “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”). ASC 810 improves financial reporting by
enterprises involved with variable interest entities and addresses (1) the
effects on certain provisions of FASB Interpretation No. 46 (revised December
2003), “Consolidation of
Variable Interest Entities,” as a result of the elimination of the
qualifying special-purpose entity concept in SFAS 166, and (2) constituent
concerns about the application of certain key provisions of Interpretation
46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about an
enterprise’s involvement in a variable interest entity. ASC 810 is effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. In
February 2010, FASB deferred the effective date of the amendments to the
consolidation requirements n certain types of entities.  The Company
is evaluating the impact that the adoption of ASC 810 will have on its
consolidated financial statements and anticipates that it will not have an
impact on the Company’s consolidated financial position or results of
operations.





In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair
Value.” This ASU clarifies the application of certain valuation
techniques in circumstances in which a quoted price in an active market for the
identical liability is not available and clarifies that when estimating the fair
value of a liability, the fair value is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer. The guidance provided in
this ASU became effective on October 1, 2009. The adoption of this ASU did
not have a material impact on our consolidated financial
statements.




In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements.” This ASU establishes the accounting and reporting guidance
for arrangements including multiple revenue-generating activities. This ASU
provides amendments to the criteria for separating deliverables, measuring and
allocating arrangement consideration to one or more units of accounting. The
amendments in this ASU also establish a selling price hierarchy for determining
the selling price of a deliverable. Significantly enhanced disclosures are also
required to provide information about a vendor’s multiple-deliverable revenue
arrangements, including information about the nature and terms, significant
deliverables, and its performance within arrangements. The amendments also
require providing information about the significant judgments made and changes
to those judgments and about how the application of the relative selling-price
method affects the timing or amount of revenue recognition. The amendments in
this ASU are effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Early application is permitted. The Company is currently evaluating the impact
that the adoption of this ASU will have on its consolidated financial statements
but only if adopted in tandem with ASU 2009-14 (see below).


57


In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That
Include Software Elements.” This ASU changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality” and scopes these products out of
current software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered “essential to the
functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating the impact that
the adoption of this ASU will have on its consolidated financial
statements.





In
January 2010, the FASB issued additional guidance for improving disclosures
about fair value measurement. Under this guidance, two new disclosures are
required (i) transfers in and out of Level 1 and 2 measurements and the reasons
for the transfers and (ii) a gross presentation of activity within the Level 3
rollforward.  The guidance is effective for interim and annual
reporting periods beginning after December 15, 2009.  The Company does
not expect that the adoption of this guidance will have an impact on results of
operations or financial position





In May
2009, and as amended in February 2010, new authoritative accounting literature
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. This accounting principle was effective
for us as of June 30, 2009, and did not have a material impact on our
consolidated financial statements.





In
December 2007, the FASB issued new accounting standards establishing principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, including goodwill, the liabilities
assumed and any noncontrolling interest in the acquiree. This accounting
standard also establishes disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This accounting standard was effective for business
combinations for which the acquisition date is on or after January 1, 2009.
Accordingly, all business combinations that we complete are accounted for under
this new accounting standard.





NOTE
C - INVESTMENTS





The
Company’s investments include debt securities, U.S. Treasury Notes,
government and state agency bonds, corporate bonds and auction rate securities,
which are classified as either available for sale, held to maturity or trading,
depending on management’s investment intentions relating to these securities.
Available for sale securities are marked to market based on quoted market values
of the securities, with the unrealized gain and (losses), reported as
comprehensive income or (loss). For the years ended December 31, 2007, 2008 and
2009, the Company reported unrealized gain (loss) of ($1,000), $35,000 and
($107,000), respectively, on available for sale securities in comprehensive
loss. Investments categorized as held to maturity are carried at amortized cost
because the Company has both the intent and the ability to hold these
investments until they mature. The Company has classified as short-term those
securities that mature within one year, and all other securities are classified
as long-term.




The
Company’s investments include auction rate securities (“ARS”) and an auction
rate securities right (“ARSR”), each as described below.




The
Company has classified its ARS investments and ARSR as trading
securities.  Trading securities are carried at fair value, with
unrealized holding gains and losses included in other income (expense) on the
Company’s consolidated statements of operations.




At
December 31, 2008 and 2009, the Company held approximately $20.1 million and
$19.4 million fair value in ARS and ARSR, respectively. These ARS represent
interests in collateralized pools of student loan receivables issued by
agencies established by counties, cities, states and other municipal
entities within the United States.   Liquidity for these ARS is
typically provided by an auction process that resets the applicable interest
rate at pre-determined intervals.  In February 2008 and continuing in
2009, these securities failed to sell at auction. These failed auctions
represent liquidity risk exposure and are not defaults or credit
events.  As a holder of the securities, the Company continues to
receive interest on the ARS.


58


The
Company purchased all of the ARS it holds from UBS AG (“UBS”). In October 2008,
the Company received a non-transferable offer (the “Offer”) from UBS for a put
right (the “ARSR”) permitting the Company to sell to UBS at par value
all ARS previously purchased from UBS at a future date (any time during a
two-year period beginning June 30, 2010).  The Offer also included a
commitment to loan the Company 75% of the UBS-determined value of the
ARS at any time until the put is exercised at a variable interest rate that will
equal the lesser of: (i) the applicable reference rate plus a spread set forth
in the applicable credit agreement and (ii) the then-applicable weighted average
interest or dividend rate paid to the Company by the issuer of the ARS that is
pledged to UBS as collateral. In November 2008, the Company accepted the Offer.
In exchange for the Offer, the Company provided UBS with a general release of
claims (other than certain consequential damages claims) concerning our ARS and
granted UBS the right to purchase the Company’s ARS at any time for full par
value.  The Company intends to exercise its right under the ARSR to
put back the ARS to UBS at the time it becomes available.





The
Company’s right under the ARSR is in substance a put option with the strike
price equal to the par value of the ARS which is recorded as an asset, measured
at fair value with the resultant gain (loss) recognized in earnings.  
The Company has classified the ARS as trading securities. The Company recognized
the following gain or (loss) in the consolidated statement of operations for the
years ended December 31, 2008 and 2009 from the change in the fair value of
these instruments:




Year ended December
      31, 2008
                      
                      Fair Value at
                        January
      01, 2008
                      
                      
                      Net
                        Purchases
                        (Maturities)
                      
                      
                      Unrealized
                        Gain
                        (Loss)
                      
                      
                      Fair Value at
                        December
      31, 2008Auction
      Rate Securities
                      
                      $
                      25,125,000
                      
                      
                      $
                      (4,700,000
                      )
                      
                      $
                      (2,308,000
                      )
                      
                      $
                      18,117,000Auction
      Rate Securities – Rights
                      
                      
                      —
                      
                      
                      
                      -
                      
                      
                      
                      1,970,000
                      
                      
                      
                      1,970,000$
                      25,125,000
                      
                      
                      $
                      (4,700,000
                      )
                      
                      $
                      (338,000
                      )
                      
                      $
                      20,087,000




Year ended December
      31, 2009
                    
                    Fair Value at
                      January
      1, 2009
                    
                    
                    Net
                      Purchases
                      (Maturities)
                    
                    
                    Unrealized
                      Gain
                      (Loss)
                    
                    
                    Fair Value at
                      December
      31, 2009Auction
      Rate Securities
                    
                    $
                    18,117,000
                    
                    
                    $
                    (1,050,000
                    )
                    
                    $
                    809,000
                    
                    
                    $
                    17,876,000Auction
      Rate Securities – Rights
                    
                    
                    1,970,000
                    
                    
                    
                    -
                    
                    
                    
                    (471,000
                    )
                    
                    
                    1,499,000$
                    20,087,000
                    
                    
                    $
                    (1,050,000
                    )
                    
                    $
                    338,000
                    
                    
                    $
                    19,375,000




The fair
value of the ARSR was based on an approach in which the present value of all
expected future cash flows was subtracted from the current fair market value of
the security and the resultant value was calculated as a future value at an
interest rate reflective of counterparty risk.


59


Given the
substantial dislocation in the financial markets and among financial services
companies, there can be no assurance that UBS ultimately will have the ability
to repurchase the Company’s ARS at par, or at any other price, as these rights
will be an unsecured contractual obligation of UBS, or that if UBS determines to
purchase the Company’s ARS at any time, the Company will be able to reinvest the
cash proceeds of any such sale at the same interest rate or dividend yield
currently being paid to the Company.  Also, as a condition of
accepting the ARSR, the Company was required to sign a release of claims against
UBS, which will prevent the Company from making claims against UBS related to
the Company’s investment in ARS, other than claims for consequential
damages.




The cost,
gross unrealized gains (losses) and fair value of available for sale, held to
maturity and trading to maturity securities by major security type at December
31, 2008 and 2009 were as follows:




December 31, 2008
                        
                        Cost
                        
                        
                        Unrealized
                          Gain
                        
                        
                        Unrealized
                          Loss
                        
                        
                        Fair
                          ValueInvestments –
      short termAvailable
      for saleGovernment
      agency bonds
                        
                        $
                        4,801,000
                        
                        
                        $
                        10,000
                        
                        
                        $
                        (7,000
                        )
                        
                        $
                        4,804,000Total
      available for sale
                        
                        
                        4,801,000
                        
                        
                        
                        10,000
                        
                        
                        
                        (7,000
                        )
                        
                        
                        4,804,000Held
      to maturity securitiesGovernment
      agency bonds
                        
                        
                        3,746,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,746,000Total investments
      - short term
                        
                        
                        8,547,000
                        
                        
                        
                        10,000
                        
                        
                        
                        (7,000
                        )
                        
                        
                        8,550,000Investments
      – long termAvailable
      for saleGovernment
      agency bonds
                        
                        
                        11,417,000
                        
                        
                        
                        43,000
                        
                        
                        
                        —
                        
                        
                        
                        11,460,000Total
      available for sale
                        
                        
                        11,417,000
                        
                        
                        
                        43,000
                        
                        
                        
                        —
                        
                        
                        
                        11,460,000Held
      to maturity securitiesGovernment
      agency bonds
                        
                        
                        1,846,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,846,000Corporate
      bonds
                        
                        
                        1,518,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,518,000Total
      held to maturity securities
                        
                        
                        3,364,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,364,000Trading
      securitiesAuction
      rate securities
                        
                        
                        20,425,000
                        
                        
                        
                        
                        
                        
                        
                        (2,308,000
                        )
                        
                        
                        18,117,000Auction
      rate securities put right
                        
                        
                        
                        
                        
                        
                        1,970,000
                        
                        
                        
                        
                        
                        
                        
                        1,970,000Total
      trading securities
                        
                        
                        20,425,000
                        
                        
                        
                        1,970,000
                        
                        
                        
                        (2,308,000
                        )
                        
                        
                        20,087,000Total investments
      – long term
                        
                        
                        35,206,000
                        
                        
                        
                        2,013,000
                        
                        
                        
                        (2,308,000
                        )
                        
                        
                        34,911,000Total
      investments
                        
                        $
                        43,753,000
                        
                        
                        $
                        2,023,000
                        
                        
                        $
                        (2,315,000
                        )
                        
                        $
                        43,461,000


60




December 31, 2009
                            
                            Cost
                            
                            
                            Unrealized
                              Gain
                            
                            
                            Unrealized
                              Loss
                            
                            
                            Fair
                              ValueInvestments –
      short termAvailable
      for saleGovernment
      agency bonds
                            
                            $
                            10,848,000
                            
                            
                            $
                            —
                            
                            
                            $
                            (61,000
                            )
                            
                            $
                            10,787,000Total
      available for sale
                            
                            
                            10,848,000
                            
                            
                            
                            —
                            
                            
                            
                            (61,000
                            )
                            
                            
                            10,787,000Held
      to maturity securitiesUS
      Treasury Notes
                            
                            
                            763,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            763,000Government
      agency bonds
                            
                            
                            1,949,00
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,949,000Corporate
      bonds
                            
                            
                            1,035,000
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,035,000Total
      held to maturity
                            
                            
                            3,747,000
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,747,000Trading
      securitiesAuction
      rate securities
                            
                            
                            19,375,000
                            
                            
                            
                            
                            
                            
                            
                            (1,499,000
                            )
                            
                            
                            17,876,000Auction
      rate securities – rights
                            
                            
                            
                            
                            
                            
                            1,499,000
                            
                            
                            
                            
                            
                            
                            
                            1,499,000Total
      trading securities
                            
                            
                            19,375,000
                            
                            
                            
                            1,499,000
                            
                            
                            
                            (1,499,000
                            )
                            
                            
                            19,375,000Total
      investments – short term
                            
                            
                            33,970,000
                            
                            
                            
                            1,499,000
                            
                            
                            
                            (1,560,000
                            )
                            
                            
                            33,909,000Investments –
      long termHeld
      to maturity securitiesUS
      Treasury Notes
                            
                            
                            770,000
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            770,000Government
      agency bonds
                            
                            
                            2,349,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,349,000Corporate
      bonds
                            
                            
                            3,633,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,633,000Total investments
      – long term
                            
                            
                            6,752,00
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            6,752,000Total
      investments
                            
                            $
                            40,722,000
                            
                            
                            $
                            1,499,000
                            
                            
                            $
                            (1,560,000
                            )
                            
                            $
                            40,661,000





NOTE
D - INVENTORIES





Inventories
as of December 31, 2008 and 2009 consist of the following:





December 31,2008
                    
                    
                    2009Components
                    
                    $
                    1,028,000
                    
                    
                    $
                    898,000Finished
      goods
                    
                    
                    2,993,000
                    
                    
                    
                    4,519,0004,021,000
                    
                    
                    
                    5,417,000Less:
      Inventory reserves
                    
                    
                    (748,000
                    )
                    
                    
                    (930,000
                    )$
                    3,273,000
                    
                    
                    $
                    4,487,000


61


NOTE
E - FIXED ASSETS





Fixed
assets are stated at cost, less accumulated depreciation and amortization, and
at December 31, 2008 and 2009, are summarized as follows:




December 31,2008
                    
                    
                    2009Equipment
                    
                    $
                    918,000
                    
                    
                    $
                    1,011,000Computer
      software
                    
                    
                    528,000
                    
                    
                    
                    414,000Computer
      hardware
                    
                    
                    700,000
                    
                    
                    
                    774,000Furniture
      and fixtures
                    
                    
                    176,000
                    
                    
                    
                    184,000Automobiles
                    
                    
                    47,000
                    
                    
                    
                    80,000Leasehold
      improvements
                    
                    
                    504,000
                    
                    
                    
                    514,0002,873,000
                    
                    
                    
                    2,977,000Accumulated
      depreciation and amortization
                    
                    
                    (1,823,000
                    )
                    
                    
                    (2,060,000
                    )$
                    1,050,000
                    
                    
                    $
                    917,000




Depreciation
expense was $544,000, $540,000 and $530,000 for the years ended December 31,
2007, 2008 and 2009, respectively.





NOTE
F – ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS




On April
18, 2008, the Company acquired the assets of PowerKey, the industrial vehicle
monitoring products division of International Electronics, Inc., a manufacturer
of access control and security equipment for approximately $573,000, which
includes approximately $73,000 of direct acquisition costs. The tangible assets
acquired include inventory (approximately $191,000), and fixed assets
(approximately $4,000).





Allocation
of the purchase price of the intangible assets consists of the following:
goodwill (approximately $200,000), trademarks and trade names (approximately
$74,000), and a customer list (approximately $104,000).





On
October 19, 2009, the Company acquired Didbox Ltd. (“Didbox”), a privately
held manufacturer and marketer of vehicle operator identification systems based
in the United Kingdom (“UK”). The transaction was valued at approximately
$660,000 and was structured with $534,000 paid up front in cash and contingent
consideration of $110,000 due in 12 months based upon achievement of certain
revenue and operating profit targets. The Company expects Didbox to meet the
revenue and operating profit targets. The contingent consideration will be
evaluated on a quarterly basis and any change in estimate will be recorded
through earnings. The potential undiscounted amount of all future payments that
could be required to be paid under the contingent consideration arrangement is
between $99,000 and $110,000.  The Company incurred
acquisition-related expenses of approximately $43,000, which are included in
selling, general and administrative expenses in the consolidated statement of
operations for the year ended December 31, 2009. The Didbox business complements
the Company’s existing businesses with access to OEM dealer network in the UK,
and the ability to add the I.D. System solution set to its product line.
  In addition, the acquisition is expected to provide the Company with
access to a broader base of customers in Europe.


62


The
assets and liabilities of the acquired businesses are accounted for under the
purchase method of accounting and recorded at their estimated fair values at the
dates of acquisition.  The excess of the purchase price over the
estimated fair values of the net assets acquired was recorded as
goodwill.  The goodwill is not expected to be deductible for tax
purposes.  Allocation of the Didbox purchase price consists of the
following:





Current
      assets
                    
                    $
                    93,000Other
      assets
                    
                    
                    36,000Current
      liabilities
                    
                    
                    (104,000
                    )Goodwill
                    
                    
                    419,000Trademarks
      and tradenames
                    
                    
                    61,000Customer
      list
                    
                    
                    56,000Other
      intangibles
                    
                    
                    83,000Fair
      value of assets acquired
                    
                    $
                    644,000





The
results of operations of acquired businesses have been included in the
consolidated statement of operations as of the effective date of
acquisition.  Pro forma results of operations have not been presented
because the effects of the acquisition were not material.





The
Company tests the goodwill and other intangible assets on an annual basis in the
fourth quarter or more frequently if the Company believes indicators of
impairment exist. At December 31, 2009, the Company determined that no
impairment existed to the goodwill, customer list and trademark and trade name
of its acquired intangible assets. The Company also determined that the use of
indefinite lives for the customer list and trademark and trade name remains
applicable at December 31, 2009, as the Company expects to derive future
benefits from these intangible assets.





The
changes in the carrying amount of goodwill from January 1, 2008 to December 31,
2009 is as follows:





Balance
      of as January 1, 2008
                    
                    $
                    —PowerKey
      acquisition
                    
                    
                    200,000Balance
      as of December 31, 2008
                    
                    
                    200,000Didbox
      acquisition
                    
                    
                    419,000Balance
      as of December 31, 2009
                    
                    $
                    619,000





Identifiable
intangible assets are comprised of the following:





2008
                    
                    
                    
                    
                    
                    2009Amortized:
                    
                    Useful
                      Live
                    
                    
                    Gross Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Gross Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net
                      Carrying
                      AmountTechnology
                    
                    
                    5
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    50,000
                    
                    
                    $
                    (2,000
                    )
                    
                    $
                    48,000Workforce
                    
                    
                    5
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    33,000
                    
                    
                    
                    (1,000
                    )
                    
                    
                    32,000Customer
      list
                    
                    
                    5
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    56,000
                    
                    
                    
                    —
                    
                    
                    
                    56,000139,000
                    
                    
                    
                    (3,000
                    )
                    
                    
                    136,000Unamortized:Customer
      list
                    
                    
                    
                    
                    
                    $
                    104,000
                    
                    
                    
                    
                    
                    
                    
                    104,000
                    
                    
                    
                    —
                    
                    
                    
                    104,000Trademark
      and Tradename
                    
                    
                    
                    
                    
                    
                    74,000
                    
                    
                    
                    
                    
                    
                    
                    135,000
                    
                    
                    
                    —
                    
                    
                    
                    135,000178,000
                    
                    
                    
                    
                    
                    
                    
                    239,000
                    
                    
                    $
                    —
                    
                    
                    
                    135,000Total
                    
                    
                    
                    
                    
                    $
                    178,000
                    
                    
                    
                    
                    
                    
                    $
                    378,000
                    
                    
                    
                    (3,000
                    )
                    
                    $
                    375,000





Amortization
expense for the years ended December 31, 2007, 2008 and 2009 was $-0-, $-0- and
$3,000, respectively.  Amortization of these intangible assets for
2010 through 2014 is expected to be approximately $27,000 per
year.


63


NOTE
G – LINE OF CREDIT




In
October 2008, the Company received an offer (the “Offer”) from UBS for a put
right  (the “ARSR”) permitting the Company to sell to UBS at par
value all ARS held by the Company, all of which were purchased
by the Company from UBS, at a future date (any time during a two-year
period beginning June 30, 2010).  Included as part of the Offer, the
Company received a commitment to obtain a loan for 75% of the
UBS-determined value of the ARS at any time until the put option is exercised at
a variable interest rate (1.24% at December 31, 2009) that will equal the lesser
of: (i) the applicable reference rate plus a spread set forth in the applicable
credit agreement and (ii) the then-applicable weighted average interest or
dividend rate paid to the Company by the issuer of the ARS that is pledged to
UBS as collateral. The Company accepted the Offer in November 2008. In March
2009, the Company borrowed $12,900,000 (which amount was equal to 75% of the
UBS-determined value of the ARS) against this credit facility. Principal
payments reduced the Company’s obligation to $11,638,000 at December 31, 2009.
This line of credit facility is payable on demand.




NOTE
H – STOCK-BASED COMPENSATION





[1]           Stock
options:




The
Company adopted the 1995 Stock Option Plan, pursuant to which the Company had
the right to grant options to purchase up to an aggregate of 1,250,000 shares of
common stock. The Company also adopted the 1999 Stock Option Plan, pursuant to
which the Company had the right to grant stock awards and options to purchase up
to 2,813,000 shares of common stock. The Company also adopted the 1999 Director
Option Plan, pursuant to which the Company had the right to grant options to
purchase up to an aggregate of 600,000 shares of common stock. The 1995
Stock Option Plan expired during 2005 and the 1999 Stock and Director Option
Plans expired during 2009 and the Company cannot issue additional options under
these plans.




The
Company adopted the 2007 Equity Compensation Plan, pursuant to which the
Company may grant options to purchase up to an aggregate of 2,000,000 shares of
common stock. The Company also adopted the 2009 Non-Employee Director
Equity Compensation Plan, pursuant to which the Company may grant options to
purchase up to an aggregate of 300,000 shares of common stock. The plans are
administered by the Compensation Committee of the Company’s Board of Directors,
which has the authority to determine, among other things, the term during which
an option may be exercised (not more than 10 years), the exercise price of an
option and the vesting provisions.




A summary
of the status of the Company's stock option plans as of December 31, 2007, 2008
and 2009 and changes during the years then ended, is presented
below:


64





2007
                
                2008
                
                2009Weighted
                
                
                
                Weighted
                
                
                
                WeightedAverage
                
                
                
                Average
                
                
                
                AverageNumber of
                  Shares
                
                Exercise
                  Price
                
                Number of
                  Shares
                
                Exercise
                  Price
                
                Number of
                  Shares
                
                Exercise
                  PriceOutstanding
      at beginning of year
                
                
                2,784,000
                
                
                $
                8.97
                
                
                
                2,761,000
                
                
                $
                9.57
                
                
                
                2,601,000
                
                
                $
                9.81Granted
                
                
                308,000
                
                
                
                13.37
                
                
                
                602,000
                
                
                
                6.66
                
                
                
                349,000
                
                
                
                3.61Exercised
                
                
                (205,000
                )
                
                
                1.79
                
                
                
                (505,000
                )
                
                
                2.73
                
                
                
                (1,000
                )
                
                
                2.31Expired
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                (22,000
                )
                
                
                4.13Forfeited
                
                
                (126,000
                )
                
                
                18.26
                
                
                
                (257,000
                )
                
                
                13.74
                
                
                
                (268,000
                )
                
                
                11.44Outstanding
      at end of year
                
                
                2,761,000
                
                
                $
                9.57
                
                
                
                2,601,000
                
                
                $
                9.81
                
                
                
                2,659,000
                
                
                $
                8.88Exercisable
      at end of year
                
                
                1,677,000
                
                
                $
                7.13
                
                
                
                1,485,000
                
                
                $
                9.37
                
                
                
                1,662,000
                
                
                $
                9.51





The
following table summarizes information about stock options at December 31,
2009:




Options Outstanding
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Options ExercisableExercise
                                                    Prices
                                                  
                                                  Number
                                                    Outstanding
                                                  
                                                  Weighted
                                                    Average
                                                    Remaining
                                                    Contractual
                                                    Life
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise
                                                    Price
                                                  
                                                  
                                                  Aggregate
                                                    Intrinsic
                                                    Value
                                                  
                                                  
                                                  Number
                                                    Outstanding
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise
                                                    Price
                                                  
                                                  
                                                  Aggregate
                                                    Intrinsic
                                                    Value1.20 – 3.81
                                                  
                                                  
                                                  344,000
                                                  
                                                  8 years
                                                  
                                                  $
                                                  3.42
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  51,000
                                                  
                                                  
                                                  $
                                                  2.723.82 – 7.40
                                                  
                                                  
                                                  989,000
                                                  
                                                  5 years
                                                  
                                                  
                                                  5.80
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  699,000
                                                  
                                                  
                                                  
                                                  6.117.41  – 14.15
                                                  
                                                  
                                                  1,030,000
                                                  
                                                  5 years
                                                  
                                                  
                                                  10.24
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  702,000
                                                  
                                                  
                                                  
                                                  10.0714.16
      – 19.94
                                                  
                                                  
                                                  81,000
                                                  
                                                  6
      years
                                                  
                                                  
                                                  17.12
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  71,000
                                                  
                                                  
                                                  
                                                  17.1419.95 –
      25.38
                                                  
                                                  
                                                  215,000
                                                  
                                                  6
      years
                                                  
                                                  
                                                  22.23
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  139,000
                                                  
                                                  
                                                  
                                                  22.352,659,000
                                                  
                                                  6
      years
                                                  
                                                  $
                                                  8.88
                                                  
                                                  
                                                  $
                                                  28,000
                                                  
                                                  
                                                  
                                                  1,662,000
                                                  
                                                  
                                                  $
                                                  9.51
                                                  
                                                  
                                                  $
                                                  28,000




Number
                    Outstanding
                  
                  
                  WeightedAverage
                    Exercise
                    Price
                  
                  
                  Aggregate
                    Intrinsic
                    Value
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    LifeOptions
      exercisable at December 31, 2009
                  
                  
                  1,662,000
                  
                  
                  $
                  9.51
                  
                  
                  $
                  28,000
                  
                  
                  
                  4.04Vested
      and expected to vest at December 31, 2009
                  
                  
                  2,659,000
                  
                  
                  $
                  8.88
                  
                  
                  $
                  28,000
                  
                  
                  
                  5.64





For the
years ended December 31, 2007, 2008 and 2009, the Company recorded $2,347,000,
$2,184,000 and $1,937,000, respectively,  of stock-based compensation
expense in connection with the stock option grants.  The total
intrinsic value of options exercised during the years ended December 31, 2007,
2008 and 2009 was $1,899,000, $2,476,000 and $2,000, respectively.





The fair
value of options vested during the years ended December 31, 2008 and 2009 was
$2,209,000 and $2,178,000, respectively.  As of December 31, 2009,
there was $3,065,000 of total unrecognized compensation costs related to
non-vested options granted under the plans. That cost is expected to be
recognized over a weighted-average period of 2.09 years.


65


[2]           Restricted
Stock Awards:




In 2006,
Company began granting restricted stock to employees, whereby the employees are
contractually restricted from transferring the shares until they are vested. The
fair value of each share is based on the Company’s closing stock price on the
date of the grant. A summary of the non-vested shares for the years ended
December 31, 2007, 2008 and 2009 is as follows:




Number of
                      Non-vested
                      Shares
                    
                    
                    Weighted
                      AverageGrant
                      Date
                      Fair ValueNon-vested
      at January 1, 2007
                    
                    
                    91,000
                    
                    
                    $
                    18.99Granted
                    
                    
                    20,000
                    
                    
                    
                    13.85Vested
                    
                    
                    (45,000
                    )
                    
                    
                    18.99Forfeited
                    
                    
                    (1,000
                    )
                    
                    
                    18.89Non-vested
      at December 31, 2007
                    
                    
                    65,000
                    
                    
                    $
                    17.40Granted
                    
                    
                    21,000
                    
                    
                    
                    7.41Vested
                    
                    
                    (50,000
                    )
                    
                    
                    17.96Forfeited
                    
                    
                    (5,000
                    )
                    
                    
                    18.89Non-vested
      at December 31, 2008
                    
                    
                    31,000
                    
                    
                    $
                    9.49Granted
                    
                    
                    162,000
                    
                    
                    
                    3.54Vested
                    
                    
                    (21,000
                    )
                    
                    
                    10.55Forfeited
                    
                    
                    —Non-vested
      at December 31, 2009
                    
                    
                    172,000
                    
                    
                    $
                    3.78





For the
years ended December 31, 2007, 2008 and 2009, the Company recorded $941,000,
$513,000 and $205,000, respectively, of stock-based compensation expense in
connection with the restricted stock grants. As of December 31, 2009, there was
$479,000 of total unrecognized compensation cost related to non-vested shares.
That cost is expected to be recognized over a weighted-average period of 2.35
years.




[3]           Performance
Shares:





In June
2006, the Compensation Committee granted 85,000 performance shares to key
employees pursuant to the 1999 Stock Option Plan. The issuance of the shares of
the Company’s common stock underlying the performance shares is subject to the
achievement of revenue and gross margin levels during a two-year performance
period. If the performance criteria  are not met during that two-year
period, then the performance shares will not vest and will automatically be
returned to the plan. If the performance triggers are met, then the shares will
be issued to the employees. For the year ended December 31, 2006, performance
criteria was met for 31,875 shares, which were subsequently issued in 2007, and
10,625 performance shares were returned to the plan. For the year ended December
31, 2006, the Company recorded $602,000 of stock-based compensation expense in
connection with the performance shares. For the year ended December 31, 2007,
the performance criteria were not met, and 42,500 shares were returned to the
plan.


66


In
January 2007, the Compensation Committee granted 62,500 performance shares to
key employees pursuant to the 1999 Stock Option Plan. The issuance of the shares
of the Company’s common stock underlying the performance shares is subject to
the achievement of revenue and gross margin levels during a two-year performance
period. If the performance criteria  are  not met during
that two-year period, then the performance shares will not vest and will
automatically be returned to the plan. If the performance triggers are met, then
the shares will be issued to the employees. For the years ended December 31,
2007 and 2008, the performance criteria were not met, and 62,500 shares were
returned to the plan.





In
January 2008, the Compensation Committee granted 52,500 performance shares to
key employees pursuant to the 1999 Stock Option Plan. The issuance of the shares
of the Company’s common stock underlying the performance shares is subject to
the achievement of revenue levels during a one-year performance period. If the
performance criteria  are not met during that one-year period, then
the performance shares will not vest and will automatically be returned to the
plan. If the performance triggers  are  met, then the shares
will be issued to the employees. For the year ended December 31, 2008, the
performance criteria were met for 39,375 shares, which were issued in 2009, and
13,125 shares were returned to the plan. For the year ended December 31, 2008,
the Company recorded $292,000 of stock-based compensation expense in connection
with the performance shares.





In June
2009, the Compensation Committee granted 233,000 performance shares to key
employees pursuant to the 2007 Equity Compensation Plan. The issuance of the
shares of the Company’s common stock underlying the performance shares is
subject to the achievement of stock price targets of the Company’s common stock
at the end of a three-year measurement period ending in January 2012, with the
ability to achieve prorated performance shares during interim annual measurement
periods from January 31, 2009 to January 31, 2012. January of each year from
2009 to 2012 is used as the interim measurement date, since it is assumed that
earnings announcements will take place in January with respect to the preceding
year end. If the performance triggers are not met, the performance shares will
not vest and will automatically be returned to the plan. If the performance
triggers are met, then the shares will be issued to the employees. For the
year ended December 31, 2009, the Company recorded $15,000 of stock-based
compensation expense in connection with the performance shares.





NOTE
I - STOCKHOLDERS' EQUITY




[1]           Preferred
stock:




The
Company is authorized to issue 5,000,000 shares of preferred stock, par value
$0.01 per share. The Company’s Board of Directors has the authority to issue
shares of preferred stock and to determine the price and terms of those
shares.





[2]           Stock
repurchase program:




On May 3,
2007, the Company announced that its Board of Directors had authorized the
repurchase of issued and outstanding shares of its common stock having an
aggregate value of up to $10,000,000 pursuant to a share repurchase program
established under Rule 10b-18 of the Securities Exchange Act of 1934, as
amended.  The amount and timing of such repurchases are dependent upon
the price and availability of shares, general market conditions and the
availability of cash, as determined at the discretion of the Company’s
management.  The repurchases are funded from the Company’s working
capital.  The Company’s share repurchase program does not have an
expiration date, and the Company may discontinue or suspend the share repurchase
program at any time.    All shares of common stock
repurchased under the Company’s share repurchase program are held as treasury
stock. The Company did not purchase any shares of its common stock under the
repurchase program during the year ended December 31, 2009. As of
December 31, 2008 and 2009, the Company has purchased approximately 1,075,000
shares of its common stock in open market transactions under the stock
repurchase program for an aggregate purchase price of approximately $9,970,000,
or an average cost of $9.27 per share.


67


[3]           Rights
plan:




In July
2009, the Company amended its Amended and Restated Certificate of Incorporation
in order to create a new series of preferred stock, to be designated the
“Series A Junior Participating Preferred Stock” (hereafter referred to as
“Preferred Stock”).  Shareholders of the Preferred Stock will be
entitled to certain minimum quarterly dividend rights, voting rights, and
liquidation preferences.  Because of the nature of the Series A Preferred
Stock’s dividend, liquidation and voting rights, the value of a share of
Preferred Stock is expected to approximate the value of one share of the
Company’s common stock.




In July
2009, the Company also adopted a shareholder rights plan (the “Rights Plan”),
which entitles the holders of the rights to purchase from the Company 1/1,000
th
(subject to prospective anti-dilution adjustments) of a share of Preferred Stock
of the Company at a purchase price of $19.47 (a “Right”).  The Rights Plan
has a three-year term with the possibility of two separate three-year
renewals.  Until a Right is exercised or exchanged in accordance with the
provisions of the rights agreement governing the Rights Plan, the
holder thereof, as such, will have no rights as a stockholder of the Company,
including, without limitation, the right to vote for the election of directors
or upon any matter submitted to stockholders of the Company or to receive
dividends or subscription rights. The Rights were registered with the
Securities and Exchange Commission in July 2009.




On June
29, 2009, the Board of Directors of the Company declared a dividend of one Right
for each outstanding share of common stock.  The dividend was paid on
July 13, 2009 to the stockholders of record on that date.




[4]           Shares
withheld:





During
the year ended December 31, 2007, 22,000 shares of the Company’s common
stock were withheld to satisfy tax withholding obligations in the amount of
$344,000, in connection with the vesting of restricted and performance shares.
During the year ended December 31, 2008, 51,000 shares of the Company’s common
stock were withheld to satisfy tax withholding obligations and to pay the
exercise price of such awards in the aggregate amount of $424,000 in connection
with the vesting of restricted shares and the exercise of stock
options.  During the year ended December 31, 2009, 20,000 shares of
the Company’s common stock were withheld to satisfy tax withholding obligations
and to pay the exercise price of such awards in the aggregate amount of $65,000
in connection with the vesting of restricted shares and the exercise of stock
options.




NOTE J - INCOME TAXES





At
December 31, 2009, the Company had an aggregate net operating loss carryforward
of approximately $38,220,000 for U.S. federal income tax purposes, of which
$7,508,000 relates to stock options for which there were no compensation charges
for financial reporting. Accordingly, any future tax benefit upon utilization of
that net operating loss would be credited to additional paid-in capital. 
The Company has not included this amount in deferred tax assets.  At
December 31, 2009, the Company had an aggregate net operating loss carryforward
of approximately $29,038,000 for state income tax purposes and a foreign net
operating loss carryforward of approximately $98,000. Substantially all of the
net operating loss carryforwards expire from 2020 through 2029 for federal
purposes and from 2010 through 2016 for state purposes.  The net operating
loss carryforwards may be limited to use in any particular year based on
Internal Revenue Code sections related to change of ownership
restrictions.  In addition, future stock issuances may subject the Company
to annual limitations on the utilization of its net operating loss carryforwards
under the same Internal Revenue Code provision.





The
Company has net deferred tax asset of approximately $8,867,000 and $13,459,000
at December 31, 2008 and 2009, respectively.  The increase in the deferred
tax asset is primarily attributed to $11,745,000 of net operating losses
for the year.  The Company had other temporary differences between
financial and tax reporting for stock-based compensation, fixed asset
depreciation expense, and acquisition-related expenses.





The
Company has elected to use the incremental approach for financial statement
purposes. Under this approach, the Company will utilize net operating loss
carryforwards before utilizing excess benefit from exercise of options during
the current year.  The Company has provided a valuation allowance against
the full amount of its deferred tax asset, since the likelihood of realization
cannot be determined.  The valuation allowance increased in 2007, 2008 and
2009 by $2,040,000, $535,000 and $4,592,000, respectively.


68


Loss
before income taxes consists of the following:





Year Ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009U.S.
      operations
                    
                    $
                    (7,341,000
                    )
                    
                    $
                    (4,175,000
                    )
                    
                    $
                    (13,120,000
                    )Foreign
      operations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (72,000
                    )$
                    (7,341,000
                    )
                    
                    $
                    (4,175,000
                    )
                    
                    $
                    (13,192,000
                    )





The
difference between income taxes at the statutory federal income tax rate and
income taxes reported in the statements of operations is attributable to the
following:





Year Ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009Income
      tax benefit at the federal statutory rate
                    
                    $
                    (2,496,000
                    )
                    
                    $
                    (1,419,000
                    )
                    
                    $
                    (4,485,000
                    )State
      and local income taxes, net of effect on federal taxes
                    
                    
                    (436,000
                    )
                    
                    
                    (248,000
                    )
                    
                    
                    (792,000
                    )Increase
      (decrease) in valuation allowance
                    
                    
                    2,040,000
                    
                    
                    
                    535,000
                    
                    
                    
                    4,592,000Fixed
      assets accumulated book/tax difference - prior year
                    
                    
                    —
                    
                    
                    
                    (196,000
                    )ISO
      grants and restricted shares
                    
                    
                    837,000
                    
                    
                    
                    990,000
                    
                    
                    
                    655,000Foreign
      net operating loss carryforward
                    
                    
                    —
                    
                    
                    
                    —Expiration
      of state net operating loss
                    
                    
                    —
                    
                    
                    
                    254,000
                    
                    
                    
                    129,000Other
                    
                    
                    55,000
                    
                    
                    
                    84,000
                    
                    
                    
                    (99,000
                    )$
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2009
are presented below:





December 31,2008
                      
                      
                      2009Deferred
      tax assets:Net
      operating loss carryforwards
                      
                      $
                      7,647,000
                      
                      
                      $
                      11,745,000Fixed
      assets, depreciation
                      
                      
                      218,000
                      
                      
                      
                      207,000Stock-based
      compensation
                      
                      
                      867,000
                      
                      
                      
                      994,000Unrealized
      loss, auction-rate securities
                      
                      
                      135,000
                      
                      
                      
                      —Acquisition
      related expenses
                      
                      
                      
                      
                      
                      
                      513,0008,867,000
                      
                      
                      
                      13,459,000Less:
      Valuation allowance
                      
                      
                      (8,867,000
                      )
                      
                      
                      (13,459,000
                      )Net
      deferred tax assets
                      
                      $
                      —
                      
                      
                      $
                      —


69


NOTE
K - FAIR VALUE MEASUREMENTS





The
Company utilizes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is
a brief description of those levels:




§
            Level 1: Unadjusted quoted prices
      in active markets for identical assets or
    liabilities.





§
            Level 2: Inputs other than quoted
      prices that are observable for the asset or liability, either directly or
      indirectly. These include quoted prices for similar assets or liabilities
      in active markets and quoted prices for identical or similar assets or
      liabilities in markets that are not
  active.




§
            Level 3: Unobservable inputs that
      reflect the reporting entity’s own
  assumptions.




The
following table summarizes the fair values of the Company’s investments in the
balance sheet:




Balance at
                      December 31,
                    
                    
                    Basis of Fair Value Measurements2009
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets:Cash
      Equivalents
                    
                    
                    887,000
                    
                    
                    
                    887,000Investments –
      short term
                    
                    $
                    33,909,000
                    
                    
                    $
                    14,534,000
                    
                    
                    $
                    —
                    
                    
                    $
                    19,375,000Investments –
      long term
                    
                    
                    6,752,000
                    
                    
                    
                    6,752,000
                    
                    
                    
                    —$
                    41,548,000
                    
                    
                    $
                    22,173,000
                    
                    
                    $
                    —
                    
                    
                    $
                    19,375,000





The table
below includes a roll forward of the Company’s investments in ARS and ARSR from
January 1, 2009 to December 31, 2009:





Fair
      value, January 1, 2009
                    
                    $
                    20,087,000Net
      maturities
                    
                    
                    (1,050,000
                    )Unrealized
      gain included in consolidated statement of operations
                    
                    
                    338,000Fair
      value, December 31, 2009
                    
                    $
                    19,375,000





NOTE
L – WHOLLY OWNED FOREIGN SUBSIDIARIES




In May
2009, the Company formed an entity in Germany called I.D. Systems, GmbH (the
“GmbH”). This foreign entity is wholly owned by I.D. Systems, Inc. The GmbH
financial statements are consolidated with the financial statements of I.D.
Systems, Inc.




For the
period from May 15, 2009 (inception) to December 31, 2009, the GmbH’s operations
resulted in net revenues of $363,000 and a net loss of $103,000. Total assets
were $555,000 as of December 31, 2009. The GmbH operates in a local currency
environment using the Euro as its functional currency.




Existing
European sales orders/contracts and related accounting activity will remain in
I.D. Systems, Inc., until settled or completed. Existing European employees and
contractors and their related agreements were transferred to the GmbH in August
2009.




In
October 2009, the Company acquired Didbox Ltd., (the “Didbox”). This foreign
entity is wholly owned by I.D. Systems, Inc. and is headquartered in the United
Kingdom. The Didbox financial statements are consolidated with the financial
statements of I.D. Systems, Inc. as of the effective date of
acquisition.


70


For the
period from October 20, 2009 (date of acquisition) to December 31, 2009,
Didbox’s operations resulted in net revenues of $142,000 and net income of
$31,000. Total assets were $782,000 as of December 31, 2009. Didbox operates in
a local currency environment using the British Pound as its functional
currency.




Income
and expense accounts of foreign operations are translated at actual or
weighted-average exchange rates during the period. Assets and liabilities of
foreign operations that operate in a local currency environment are translated
to U.S. dollars at the exchange rates in effect at the balance sheet date, with
the related translation gains or losses reported as components of accumulated
other comprehensive income/loss in consolidated stockholders’ equity. The
translation of the GmbH’s and Didbox’s financial statements at December 31, 2009
resulted in a translation loss of $1,000 which is included in comprehensive loss
in the consolidated statement of changes in stockholders’ equity.




Gains and
losses resulting from foreign currency transactions are included in determining
net income or loss. For the year ended December 31, 2009, a foreign currency
transaction gain of $9,000 is included as an offset to selling, general and
administrative expenses in the consolidated statement of
operations.




NOTE
M – SEVERANCE AGREEMENTS




In
September 2009, the Company entered into severance agreements with four of its
executive officers. The severance agreements, each of which is substantially
identical in form, provide each executive with certain severance and change in
control benefits upon the occurrence of a “Trigger Event,” as defined in the
severance agreements.  As a condition to the Company’s obligations
under the severance agreements, each executive has executed and delivered to the
Company a restrictive covenants agreement.




Under the
terms of the severance agreements, each executive is entitled to the
following:  (i) a cash payment at the rate of the executive’s annual
base salary as in effect immediately prior to the Trigger Event for a period of
12 to 18 months, (ii) continued healthcare coverage during the severance period,
(iii) partial accelerated vesting of the executive’s previously granted stock
options and restricted stock awards, and (iv) an award of “Performance Shares”
under the Restricted Stock Unit Award Agreement previously entered into between
the Company and the executive.





NOTE
N - COMPREHENSIVE LOSS





Comprehensive
loss includes net loss and unrealized losses on available-for-sale investments.
Cumulative unrealized gains and losses on available-for-sale investments
are reflected as accumulated other comprehensive loss in stockholders’ equity on
the Company’s balance sheet.





For
the year ended December 31, 2007, comprehensive loss was $7,342,000,
which includes a net loss of $7,341,000 and an unrealized loss on
available-for-sale investments of $1,000.





For
the year ended December 31, 2008, comprehensive loss was $4,140,000,
which includes a net loss of $4,175,000 and an unrealized gain on
available-for-sale investments of $35,000.





For
the year ended December 31, 2009, comprehensive loss was $13,298,000, which
includes a net loss of $13,192,000, an unrealized loss on available-for-sale
marketable securities of $107,000 and a foreign currency translation adjustment
of $1,000.




NOTE
O – ACQUISITION-RELATED CHARGES





Included
in selling, general and administrative expenses for the year ended December 31,
2009, are approximately $1,284,000 of acquisition-related expenses incurred in
2009 in connection with the Didbox, Ltd. acquisition and Asset Intelligence, LLC
acquisition (further discussed in Note Q ), which closed on January 7,
2010.


71




NOTE
P - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS




[1]          Contingencies:





The
Company is not currently subject to any material commitments and legal
proceedings, nor, to management’s knowledge, is any material legal proceeding
threatened against the Company.





[2]          Operating
leases:




The
Company is obligated under operating leases for its facilities and offices. The
Company’s operating leases provide for minimum annual rental payments as
follows:





Year
      EndingDecember
      31,2010
                      
                      $
                      204,0002011
                      
                      
                      4,000$
                      208,000





The
office lease for the Company’s executive offices in Hackensack, New Jersey,
which expires in May 2010, also provides for escalations relating to increases
in real estate taxes and certain operating expenses. The Company is currently in
negotiations to lease new office space.  Expenses relating to
operating leases aggregated approximately $389,000, $568,000 and $596,000 for
the years ended December 31, 2007, 2008 and 2009, respectively.





During
2003, the Company entered into an agreement to sublease a portion of its space
through the end of the lease. The sublease provides for monthly payments of
approximately $12,000 and also provides for escalations relating to increases in
real estate taxes and certain operating expenses. Other income of $89,000 for
the year ended December 31, 2007 reflects rent received by the Company under the
sublease.   In July 2007, the Company released the sub lessee from the
sublease and reassumed the space.





In
February 2007, the Company began leasing space in Edgewater, New Jersey. The
lease expires in February 2011 and the rent is currently $1,995 per
month.





In March
2007, the Company began leasing office space in Suwanee, Georgia. The current
six-month renewal option lease extension expired in September 2008 and has
subsequently been renewed until March 2010. The Company expects to lease this
office on a month-to-month basis.  The rent is currently $1,815 per
month.




In
September 2007, the Company began leasing warehouse space in Clifton, New
Jersey. The lease expired in September 2008 and automatically renews on an
annual basis. The rent is currently $800 per month.





NOTE
Q – SUBSEQUENT EVENTS (UNAUDITED)




[1]         
Acquisition





On
January 7, 2010, The Company entered into a Membership Interest Purchase
Agreement (the “Purchase Agreement”) with General Electric Capital Corporation
(“GECC”) and GE Asset Intelligence, LLC (“GEAI ”), pursuant to which the Company
acquired GEAI’s telematics business (the “GEAI Business”) through the purchase
of 100% of the membership interests of Asset Intelligence, LLC (the “AI”), a
newly formed, wholly owned subsidiary of GEAI into which substantially all of
the assets, including intellectual property, and liabilities of the GEAI
Business had been transferred immediately prior to the
closing.  Effective with the closing of the transaction, AI became a
wholly owned subsidiary of the Company.  In connection with the
transaction, AI offered employment to all of the former employees of the GEAI
Business. The focus of AI’s business is in trucking, rail, marine and intermodal
applications.  In addition, the acquisition is expected to provide the
Company with access to a broader base of customers.


72


Under the
terms of the Purchase Agreement, the Company paid consideration of $15 million
in cash at closing.  In addition, the Company may be required to pay
additional cash consideration of up to $2 million in or about February 2011,
contingent upon the number of new units of telematics equipment sold
or subject to a binding order to be sold by AI during the year ending
December 31, 2010.  The purchase price is subject to a working capital
adjustment to be performed during the first quarter of 2010, pursuant to which a
portion of the cash consideration paid at closing may be returned to the Company
to the extent that the actual working capital of AI delivered at closing,
determined in accordance with a formula set forth in the Purchase Agreement, is
less than $5.5 million.




The
Company incurred acquisition-related expenses of approximately $1,355,000, of
which $1,241,000 are included in selling, general and administrative expenses
and accrued expenses as of December 31, 2009.




The
acquisition will be accounted for using the acquisition method of accounting and
the purchase price will be assigned to the net assets acquired based on the fair
value of such assets and liabilities at the date of acquisition.  The
Company is in the process of finalizing the fair value of the assets acquired
and liabilities assumed thus the preliminary allocation of the purchase may be
subject to change.  The Company recorded $1,200,000 of contingent
consideration based on the estimated number of new units of telematics equipment
expected to be sold in 2010. The contingent consideration was estimated using a
probability weighted calculation of the number of new units of telematics
equipment expected to be sold in 2010.  The preliminary allocation of
the AI purchase price consists of the following:




Current
      assets
                          
                          $
                          4,809,000Inventory
                          
                          
                          7,030,000Other
      assets
                          
                          
                          916,000Current
      liabilities
                          
                          
                          (6,383,000
                          )Intangibles
                          
                          
                          3,200,000Goodwill
      and other intangibles
                          
                          
                          6,628,000Less:
      Contingent consideration
                          
                          
                          (1,200,000
                          )Fair
      value of assets acquired
                          
                          $
                          15,000,000





The fair
value of the assets acquired and liabilities assumed and the acquired goodwill
and intangible assets is provisional pending the completion of the valuation of
these assets.  The goodwill arising from the acquisition consists
largely of the synergies and cost reductions through economies of scale expected
from combining the operations of the Company and AI.  The goodwill is
expected to be fully deductible for tax purposes except contingent consideration
is deductible only when paid.




The fair
value of the current assets acquired includes trade accounts receivables with a
fair value of $4,809,000.  The gross amount due is $5,471,000, of
which $662,000 is expected to be uncollectible.




The
following table represents the combined pro-forma balance sheet as of December
31, 2009:




(Unaudited)Pro
      FormaHistorical
                    
                    
                    CombinedCash
      and cash equivalents
                    
                    $
                    19,481,000
                    
                    
                    $
                    4,481,000Investments
      – short term
                    
                    
                    33,909,000
                    
                    
                    
                    33,909,000Accounts
      receivable - net
                    
                    
                    3,252,000
                    
                    
                    
                    8,061,000Inventory
      - net
                    
                    
                    4,487,000
                    
                    
                    
                    11,517,000Other
      current assets
                    
                    
                    783,000
                    
                    
                    
                    783,000Total
      current assets
                    
                    
                    61,912,000
                    
                    
                    
                    58,751,000Total
      other assets
                    
                    
                    8,663,000
                    
                    
                    
                    19,407,000Total
      Assets
                    
                    $
                    70,575,000
                    
                    
                    $
                    78,158,000Total
      current liabilities
                    
                    
                    14,233,000
                    
                    
                    $
                    21,816,000Total
      long term liabilities
                    
                    
                    461,000
                    
                    
                    
                    461,000Total
      liabilities
                    
                    
                    14,694,000
                    
                    
                    
                    22,277,000Total
      stockholders’ equity
                    
                    
                    55,881,000
                    
                    
                    
                    55,881,000Total
      liabilities and stockholders’ equity
                    
                    $
                    70,575,000
                    
                    
                    $
                    78,158,000


73


As of the
effective time of the acquisition contingencies are required to be measured at
fair value, if the acquisition-date fair value of the asset or liability arising
from a contingency can be determined. The asset or liability would be recognized
at the acquisition date if both of the following criteria were met: (i) it is
probable that an asset existed or that a liability had been incurred at the
acquisition date, and (ii) the amount of the asset or liability can be
reasonably estimated. These criteria are to be applied using the guidance in ASC
Topic 405, Contingencies. As of the date
of acquisition GEAI was involved in various legal proceedings. However, I.D.
Systems is still reviewing information regarding the fair value of these
contingencies. A fair valuation effort requires review of legal matters and
associated defense strategies, which are in progress. As required, AI currently
accounts for these contingencies under ASC Topic 405. If fair value cannot be
determined for AI’s contingencies, the combined company would continue to
account for the AI contingencies using ASC Topic 405. For the purpose of these
pro forma combined financial statements, I.D. Systems has not adjusted the AI
book values for contingencies. This approach is preliminary and subject to
change after completion of the final review and assessment of the
contingencies.





The
following table represents the combined pro-forma revenue and earnings for the
year ended December 31, 2009:




(Unaudited)Pro
      FormaHistorical
                      
                      
                      CombinedRevenue
                      
                      $
                      10,316,000
                      
                      
                      $
                      37,625,000Net
      loss
                      
                      
                      (13,192,000
                      )
                      
                      
                      (27,242,000
                      )Net
      loss per share – basic and diluted
                      
                      
                      (1.20
                      )
                      
                      
                      (2.48
                      )




The
combined pro-forma revenue and earnings were prepared as though the acquisition
had occurred as of January 1, 2009.  This summary is not necessarily
indicative of what the results of operations would have been had this business
acquisition occurred during such period, nor, does it purport to represent
results of operations for any future periods.




[2]          Reduction
in work force




As a
result of the integration of Asset Intelligence, on March 19, 2010, we
eliminated 39 positions within our company, representing approximately 32% of
our total personnel by July 31, 2010.  The total severance cost is
expected to be approximately $456,000.  In order
to earn the severance payment, employees must complete their transition duties
and execute a general release agreement.  These charges will be
incurred beginning in the first quarter of 2010 and are expected to continue
through the third quarter of 2010.  The Company expects the reduction
in work force to be completed by the end of the third quarter of
2010.


74


NOTE
R - QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)




The
following tables contain selected quarterly financial data for each quarter for
the years ended December 31, 2008 and 2009. We believe the following information
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The operating results for any period
are not necessarily indicative of results for any future periods.





Year Ended December 31, 20081st Quarter
                    
                    
                    2nd Quarter
                    
                    
                    3rd Quarter
                    
                    
                    4th QuarterRevenue:Products
                    
                    $
                    3,253,000
                    
                    
                    $
                    3,471,000
                    
                    
                    $
                    7,360,000
                    
                    
                    $
                    5,988,000Services
                    
                    
                    1,075,000
                    
                    
                    
                    1,989,000
                    
                    
                    
                    1,977,000
                    
                    
                    
                    1,933,0004,328,000
                    
                    
                    
                    5,460,000
                    
                    
                    
                    9,337,000
                    
                    
                    
                    7,921,000Cost
      of revenue:Cost
      of products
                    
                    
                    1,536,000
                    
                    
                    
                    1,678,000
                    
                    
                    
                    3,622,000
                    
                    
                    
                    3,160,000Cost
      of services
                    
                    
                    680,000
                    
                    
                    
                    917,000
                    
                    
                    
                    948,000
                    
                    
                    
                    925,0002,216,000
                    
                    
                    
                    2,595,000
                    
                    
                    
                    4,570,000
                    
                    
                    
                    4,085,000Gross
      Profit
                    
                    
                    2,112,000
                    
                    
                    
                    2,865,000
                    
                    
                    
                    4,767,000
                    
                    
                    
                    3,836,000Selling,
      general and administrative expenses
                    
                    
                    4,261,000
                    
                    
                    
                    4,278,000
                    
                    
                    
                    3,910,000
                    
                    
                    
                    4,311,000Research
      and development expenses
                    
                    
                    711,000
                    
                    
                    
                    708,000
                    
                    
                    
                    672,000
                    
                    
                    
                    792,000Other
      income and (expense)
                    
                    
                    826,000
                    
                    
                    
                    593,000
                    
                    
                    
                    434,000
                    
                    
                    
                    35,000Net
      (loss) income
                    
                    $
                    (2,034,000
                    )
                    
                    $
                    (1,528,000
                    )
                    
                    $
                    619,000
                    
                    
                    $
                    (1,232,000
                    )Net
      (loss) income per share – basic and diluted
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.14
                    )
                    
                    $
                    0.06
                    
                    
                    $
                    (0.11
                    )





Year Ended December 31, 20091st Quarter
                    
                    
                    2nd Quarter
                    
                    
                    3rd Quarter
                    
                    
                    4th QuarterRevenue:Products
                    
                    $
                    1,378,000
                    
                    
                    $
                    1,771,000
                    
                    
                    $
                    1,218,000
                    
                    
                    $
                    2,103,000Services
                    
                    
                    1,556,000
                    
                    
                    
                    913,000
                    
                    
                    
                    623,000
                    
                    
                    
                    754,0002,934,000
                    
                    
                    
                    2,684,000
                    
                    
                    
                    1,841,000
                    
                    
                    
                    2,857,000Cost
      of revenue:Cost
      of products
                    
                    
                    798,000
                    
                    
                    
                    890,000
                    
                    
                    
                    603,000
                    
                    
                    
                    1,591,000Cost
      of services
                    
                    
                    547,000
                    
                    
                    
                    323,000
                    
                    
                    
                    339,000
                    
                    
                    
                    463,0001,345,000
                    
                    
                    
                    1,213,000
                    
                    
                    
                    942,000
                    
                    
                    
                    2,054,000Gross
      profit
                    
                    
                    1,589,000
                    
                    
                    
                    1,471,000
                    
                    
                    
                    899,000
                    
                    
                    
                    803,000Selling,
      general and administrative expenses
                    
                    
                    4,211,000
                    
                    
                    
                    3,764,000
                    
                    
                    
                    3,644,000
                    
                    
                    
                    4,924,000Research
      and development expenses
                    
                    
                    689,000
                    
                    
                    
                    691,000
                    
                    
                    
                    642,000
                    
                    
                    
                    582,000Other
      income, net
                    
                    
                    239,000
                    
                    
                    
                    660,000
                    
                    
                    
                    350,000
                    
                    
                    
                    (56,000
                    )Net
      loss
                    
                    $
                    (3,072,000
                    )
                    
                    $
                    (2,324,000
                    )
                    
                    $
                    (3,037,000
                    )
                    
                    $
                    (4,759,000
                    )Net
      loss per share – basic and diluted
                    
                    $
                    (0.28
                    )
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.43
                    )


75


Item 9.   Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure




None.





Item 9A.   Controls and
Procedures




Evaluation of
Disclosure Controls and Procedures




During
the fourth quarter of our fiscal year ended December 31, 2009, our management,
including the principal executive officer and principal financial officer,
evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) related to the recording, processing,
summarization, and reporting of information in our reports that we file with the
SEC. These disclosure controls and procedures have been designed to ensure that
material information relating to us is made known to our management, including
these officers, by other of our employees, and that this information is
recorded, processed, summarized, evaluated and reported, as applicable, within
the time periods specified in the SEC’s rules and forms. Due to the inherent
limitations of control systems, not all misstatements may be detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Our controls and procedures can only provide reasonable, not absolute,
assurance that the above objectives have been met.





I.D.
Systems, Inc. acquired Didbox Ltd. during October 2009.  Management
has excluded Didbox Ltd. from its assessment of internal control over financial
reporting as of December 31, 2009 due to the acquisition occurring during the
fourth quarter of 2009.  Total assets and total revenues of Didbox
Ltd. represent approximately 1% (approximately $782,000) and 1% (approximately
$142,000), respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2009.




Based on
their evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) are effective as of December 31, 2009 to
reasonably ensure that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.




Management’s Report on
Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under this framework, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2009.





Item 9B.   Other Information





None.


76


PART
III.





Item 10.   Directors, Executive Officers and
Corporate Governance




The
Company incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2010 annual meeting of stockholders that is
responsive to the information required with respect to this Item 10; provided, however, that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 10 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the SEC prior to the filing of such
      definitive proxy statement; or•
            if
      such proxy statement is not mailed to stockholders and filed with the SEC
      within 120 days after the end of the Company’s most recently completed
      fiscal year, in which case the Company will provide such information by
      means of an amendment to this Annual Report on Form 10-K filed with the
      SEC.




Item 11.   Executive
Compensation




The
Company incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2010 annual meeting of stockholders that is
responsive to the information required with respect to this Item 11; provided, however, that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 11 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the SEC prior to the filing of such
      definitive proxy statement; or•
            if
      such proxy statement is not mailed to stockholders and filed with the SEC
      within 120 days after the end of the Company’s most recently completed
      fiscal year, in which case the Company will provide such information by
      means of an amendment to this Annual Report on Form 10-K filed with the
      SEC.




Item 12.   Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters




The
Company incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2010 annual meeting of stockholders that is
responsive to the information required with respect to this Item 12; provided, however, that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 12 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the SEC prior to the filing of such
      definitive proxy statement; or•
            if
      such proxy statement is not mailed to stockholders and filed with the SEC
      within 120 days after the end of the Company’s most recently completed
      fiscal year, in which case the Company will provide such information by
      means of an amendment to this Annual Report on Form 10-K filed with the
      SEC.


77


Item 13.   Certain Relationships and Related
Transactions, and Director Independence




The
Company incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2010 annual meeting of stockholders that is
responsive to the information required with respect to this Item 13; provided, however, that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 13 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the SEC prior to the filing of such
      definitive proxy statement; or•
            if
      such proxy statement is not mailed to stockholders and filed with the SEC
      within 120 days after the end of the Company’s most recently completed
      fiscal year, in which case the Company will provide such information by
      means of an amendment to this Annual Report on Form 10-K filed with the
      SEC.





Item 14.   Principal Accounting Fees and
Services




The
Company incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2010 annual meeting of stockholders that is
responsive to the information required with respect to this Item 14; provided , however , that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 14 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the SEC prior to the filing of such
      definitive proxy statement; or•
            if
      such proxy statement is not mailed to stockholders and filed with the SEC
      within 120 days after the end of the Company’s most recently completed
      fiscal year, in which case the Company will provide such information by
      means of an amendment to this Annual Report on Form 10-K filed with the
      SEC.


78


PART
IV.





Item 15.   Exhibits, Financial Statement
Schedules




(a)
  List of
Financial Statements, Financial Statement Schedules, and
Exhibits.




(1)          Financial Statements.
The following financial statements of I.D. Systems, Inc. are included in Item 8
of Part II of this Annual Report on Form 10-K:





Report of
Independent Registered Public Accounting Firm




Consolidated
Balance Sheets as of December 31, 2008 and 2009




Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2008 and
2009




Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended December 31,
2007, 2008 and 2009




Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and
2009




Notes to
the Consolidated Financial Statements




(2)          Financial Statement
Schedules.




Schedule
II - Valuation and Qualifying Accounts




All other
financial statement schedules are omitted from this Annual Report on Form 10-K,
as they are not required or applicable or the required information is included
in the financial statements or notes thereto.




(3)          Exhibits. The
following exhibits are filed with this Annual Report on Form 10-K or are
incorporated herein by reference, as indicated.




2.1
                  Membership
      Interest Purchase Agreement, dated as of January 7, 2010, by and among
      I.D. Systems, Inc., General Electric Capital Corporation and GE Asset
      Intelligence, LLC (incorporated by reference to Exhibit 2.1 to the Current
      Report on Form 8-K of I.D. Systems, Inc. (File No. 001-15087) filed with
      the SEC on January 13, 2010).3.1.1
                  Restated
      Certificate of Incorporation of I.D. Systems, Inc., as amended
      (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the
      Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
      333-76947) filed with the SEC on June 28, 1999).3.1.2
                  Certificate
      of Designation for the Series A Junior Participating Preferred Stock
      (incorporated by reference to Exhibit 3.3 to the Current Report on Form
      8-K of I.D. Systems, Inc. (File No. 001-15087) filed with the SEC on July
      8, 2009).3.2
                  Restated
      By-Laws of I.D. Systems, Inc. (incorporated by reference to Exhibit 3.2 to
      Amendment No. 3 to the Registration Statement on Form SB-2 of I.D.
      Systems, Inc. (File No. 333-76947) filed with the SEC on June 28,
      1999).4.1
                  Specimen
      Certificate of I.D. Systems, Inc.’s Common Stock (incorporated by
      reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement
      on Form SB-2 of I.D. Systems, Inc. (File No. 333-76947) filed with the SEC
      on June 28, 1999).4.2
                  Rights
      Agreement, dated as of July 1, 2009, between I.D. Systems, Inc. and
      American Stock Transfer & Trust Company, LLC, as Rights Agent
      (incorporated by reference to Exhibit 4.2 to the Current Report on Form
      8-K of I.D. Systems, Inc. (File No. 001-15087) filed with the SEC on July
      8, 2009).10.1
                  1995
      Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.5
      to the Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
      333-76947) filed with the SEC on April 23, 1999).*10.2
                  1999
      Stock Option Plan (incorporated by reference to Exhibit 10.6 to the
      Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
      333-76947) filed with the SEC on April 23,
  1999).*


79





10.3
                  1999
      Director Option Plan (incorporated by reference to Exhibit 10.10 to
      Amendment No. 2 to the Registration Statement on Form SB-2 of I.D.
      Systems, Inc. (File No. 333-76947) filed with the SEC on June 8,
      1999).*10.4
                  2007
      Equity Compensation Plan (incorporated by reference to Exhibit 4.4 to
      Amendment No. 2 to the Registration Statement on Form S-8 of I.D. Systems,
      Inc. (File No. 333-144709) filed with the SEC on July 19,
      2007).*10.5
                  2009
      Non-Employee Director Equity Compensation Plan (incorporated by reference
      to Exhibit 10.5 to the Quarterly Report on Form 10-Q of I.D. Systems, Inc.
      (File No. 001-15087) filed with the SEC on November 6, 2009) filed with
      the SEC on July 19, 2007).*10.6
                  Office
      Lease, dated November 4, 1999, between I.D. Systems, Inc. and Venture
      Hackensack Holding, Inc. (incorporated by reference to Exhibit 10.9 to the
      Annual Report on Form 10-KSB of I.D. Systems, Inc. for the fiscal year
      ended December 31, 1999 filed with the SEC on March 29,
    2000).10.7
                  Severance
      Agreement, dated September 11, 2009, by and between I.D. Systems, Inc. and
      Jeffrey Jagid (incorporated by reference to Exhibit 10.1 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*10.8
                  Severance
      Agreement, dated September 11, 2009, by and between the Company and Ned
      Mavrommatis (incorporated by reference to Exhibit 10.2 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*10.9
                  Severance
      Agreement, dated September 11, 2009, by and between the Company and
      Kenneth Ehrman (incorporated by reference to Exhibit 10.3 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*10.10
                  Severance
      Agreement, dated September 11, 2009, by and between the Company and
      Michael Ehrman (incorporated by reference to Exhibit 10.4 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*21.1
                  List
      of Subsidiaries (filed herewith).23.1
                  Consent
      of Eisner LLP (filed herewith).31.1
                  Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).31.2
                  Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).32.1
                  Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).32.2
                  Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).




*      Management
contract or compensatory plan or arrangement.





(b)
  Exhibits. The
exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference.  Please see the Index to Exhibits to
this Annual Report on Form 10-K, which is incorporated into this Item 15(b) by
reference.


80


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





Date:
March 31, 2010





I.D.
      SYSTEMS, INC.By:
                  /s/
      Jeffrey M. JagidJeffrey
      M. JagidChief
      Executive Officer(Principal
      Executive Officer)By:
                  /s/
      Ned MavrommatisNed
      MavrommatisChief
      Financial Officer(Principal
      Financial and Accounting
Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report is
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                                  
                                  Title
                                  
                                  Date/s/
      Jeffrey M. JagidJeffrey
      M. Jagid
                                  
                                  Chief
      Executive Officer and Director
                                  
                                  March
      31, 2010(Principal
      Executive Officer)/s/
      Kenneth S. EhrmanKenneth
      S. Ehrman
                                  
                                  President
      and Director
                                  
                                  March
      31, 2010/s/
      Ned MavrommatisNed
      Mavrommatis
                                  
                                  Chief
      Financial Officer (Principal Financial
                                  
                                  March
      31, 2010and
      Accounting Officer)/s/
      Lawrence BursteinLawrence
      Burstein
                                  
                                  Director
                                  
                                  March
      31, 2010/s/
      Harold D. Copperman
                                  
                                  
                                  
                                  March
      31, 2010Harold
      D. Copperman
                                  
                                  Director/s/
      Michael Monaco
                                  
                                  
                                  
                                  March
      31, 2010Michael
      Monaco
                                  
                                  Director


81


I.D.
SYSTEMS, INC.


SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS


(In
000’s)





Charged toBalance at
                                  
                                  (Write-off)
                                  
                                  Balance atBeginning
                                  
                                  to Costs and
                                  
                                  End ofDescription
                                  
                                  Period
                                  
                                  Expenses
                                  
                                  PeriodInventory reserveYear
      ended December 31, 2009
                                  
                                  $
                                  748
                                  
                                  $
                                  182
                                  
                                  $
                                  930Year
      ended December 31, 2008
                                  
                                  $
                                  642
                                  
                                  $
                                  126
                                  
                                  $
                                  748Year
      ended December 31, 2007
                                  
                                  $
                                  125
                                  
                                  $
                                  517
                                  
                                  $
                                  642





Charged toBalance at
                                  
                                  (Write-off )
                                  
                                  Balance atBeginning
                                  
                                  to Costs and
                                  
                                  End ofDescription
                                  
                                  Period
                                  
                                  Expenses
                                  
                                  PeriodAllowance for doubtful accountsYear
      ended December 31, 2009
                                  
                                  $
                                  239
                                  
                                  $
                                  (133
                                  )
                                  $
                                  106Year
      ended December 31, 2008
                                  
                                  $
                                  239
                                  
                                  $
                                  —
                                  
                                  $
                                  239Year
      ended December 31, 2007
                                  
                                  $
                                  239
                                  
                                  $
                                  —
                                  
                                  $
                                  239







INDEX TO
EXHIBITS





2.1
                                          Membership
      Interest Purchase Agreement, dated as of January 7, 2010, by and among
      I.D. Systems, Inc., General Electric Capital Corporation and GE Asset
      Intelligence, LLC (incorporated by reference to Exhibit 2.1 to the Current
      Report on Form 8-K of I.D. Systems, Inc. (File No. 001-15087) filed with
      the SEC on January 13, 2010).3.1.1
                                          Restated
      Certificate of Incorporation of I.D. Systems, Inc., as amended
      (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the
      Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
      333-76947) filed with the SEC on June 28, 1999).3.1.2
                                          Certificate
      of Designation for the Series A Junior Participating Preferred Stock
      (incorporated by reference to Exhibit 3.3 to the Current Report on Form
      8-K of I.D. Systems, Inc. (File No. 001-15087) filed with the SEC on July
      8, 2009).3.2
                                          Restated
      By-Laws of I.D. Systems, Inc. (incorporated by reference to Exhibit 3.2 to
      Amendment No. 3 to the Registration Statement on Form SB-2 of I.D.
      Systems, Inc. (File No. 333-76947) filed with the SEC on June 28,
      1999).4.1
                                          Specimen
      Certificate of I.D. Systems, Inc.’s Common Stock (incorporated by
      reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement
      on Form SB-2 of I.D. Systems, Inc. (File No. 333-76947) filed with the SEC
      on June 28, 1999).4.2
                                          Rights
      Agreement, dated as of July 1, 2009, between I.D. Systems, Inc. and
      American Stock Transfer & Trust Company, LLC, as Rights Agent
      (incorporated by reference to Exhibit 4.2 to the Current Report on Form
      8-K of I.D. Systems, Inc. (File No. 001-15087) filed with the SEC on July
      8, 2009).10.1
                                          1995
      Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.5
      to the Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
      333-76947) filed with the SEC on April 23, 1999).*10.2
                                          1999
      Stock Option Plan (incorporated by reference to Exhibit 10.6 to the
      Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
      333-76947) filed with the SEC on April 23, 1999).*10.3
                                          1999
      Director Option Plan (incorporated by reference to Exhibit 10.10 to
      Amendment No. 2 to the Registration Statement on Form SB-2 of I.D.
      Systems, Inc. (File No. 333-76947) filed with the SEC on June 8,
      1999).*10.4
                                          2007
      Equity Compensation Plan (incorporated by reference to Exhibit 4.4 to
      Amendment No. 2 to the Registration Statement on Form S-8 of I.D. Systems,
      Inc. (File No. 333-144709) filed with the SEC on July 19,
      2007).*10.5
                                          2009
      Non-Employee Director Equity Compensation Plan (incorporated by reference
      to Exhibit 10.5 to the Quarterly Report on Form 10-Q of I.D. Systems, Inc.
      (File No. 001-15087) filed with the SEC on November 6, 2009) filed with
      the SEC on July 19, 2007).*10.6
                                          Office
      Lease, dated November 4, 1999, between I.D. Systems, Inc. and Venture
      Hackensack Holding, Inc. (incorporated by reference to Exhibit 10.9 to the
      Annual Report on Form 10-KSB of I.D. Systems, Inc. for the fiscal year
      ended December 31, 1999 filed with the SEC on March 29,
    2000).10.7
                                          Severance
      Agreement, dated September 11, 2009, by and between I.D. Systems, Inc. and
      Jeffrey Jagid (incorporated by reference to Exhibit 10.1 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*10.8
                                          Severance
      Agreement, dated September 11, 2009, by and between the Company and Ned
      Mavrommatis (incorporated by reference to Exhibit 10.2 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*10.9
                                          Severance
      Agreement, dated September 11, 2009, by and between the Company and
      Kenneth Ehrman (incorporated by reference to Exhibit 10.3 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*10.10
                                          Severance
      Agreement, dated September 11, 2009, by and between the Company and
      Michael Ehrman (incorporated by reference to Exhibit 10.4 to the Quarterly
      Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
      September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
      2009).*







21.1
            List
      of Subsidiaries (filed herewith).23.1
            Consent
      of Eisner LLP (filed herewith).31.1
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).31.2
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).32.1
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).32.2
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).